Don’t Buy SP500 Before Watching | Episode 90

By Jason McIntosh | Published 2 December 2022

Trade the Trend is a weekly video focusing on where the stock market is going. It’s for investors and traders looking for technical analysis of the SP500, as well as stock markets and commodities markets in general. Jason uses technical analysis of stocks and trend following techniques to help you piece together the world’s biggest puzzle.

Where is the Stock Market Heading?

00:00 Intro

00:30 Be ready for SP500’s next move (many investors aren’t)

05:39 Why you should closely watch this key market

07:00 Don’t regret not buying more (remember this)

08:42 Key indicator gives a big clue to what happens next

11:35 Misinterpreting this indicator (many people do) could be costly


Please note: Charts available from video

This video is going to focus on the S&P 500. I’m going to cover the ASX 200 and gold in a separate video. Also, I’ve got a couple of fascinating indicators to show you, so make sure you stick around for those. As always, this is general commentary and doesn’t take your personal situation into account. With all of that said, let’s get into our first chart.

So, let’s kick off here with the S&P 500. And it really has been an interesting week. The S&P 500 has now run right up to the top of this downward trend line which has been in place since way back here at the start of January this year. I didn’t think we were going to get here so quickly. Last week, I thought that we may have seen more of a pullback towards these moving averages. We did start getting a pullback, and then that pullback was short-lived. We had Fed Governor Powell come out on Wednesday and talk about potentially slowing down the rate of interest rate increases, and that just set the market alight, and we’ve had that swift move upwards. So, the underlying tone of the market really does remain positive.

So, let’s jump over to the four-hourly chart and get a little bit more detail on the price action. So, when we look at on the four-hourly basis, we can see that the markets had this rally off support, so this support band at around 3900. It’s been a significant area going all the way back to May. There’s been a lot of activity around this 3900 region. And of course, that’s where Wednesday’s rally began from. And what’s also been interesting over the course of this rally from the October lows is that all the dips are being bought. And that’s what you want to see in a constructive price action. You want to see the pullbacks being relatively shallow, and you want to see buying interests coming in to underpin those pullbacks. And that’s what we’ve been seeing. And the rallies have also been impulsive. So, we had the impulsive rally here in early November. And then, of course, Wednesday’s rally was impulsive as well as so are many of these rallies back here. We’re getting impulsive rallies and then corrective-looking pullbacks.

And another thing which was interesting in the price action over the last week is that the market broke up from this little triangle trading range. It’s always interesting to look at the charts, look at the price actions, spot these patterns. So, this is your classic triangle trading range. And what you can do when you get a trading range is you can get a measured move, and that gives you a guide as to where the market may go next. It doesn’t tell you for certainty where it’s going to go, but it at least gives you a guide, unless just… So, what you do, you measure the width of the range and then you project that high from the breakout point. So, you can see that gives us a level just below 4200.

Another measurement we can do, we can do a different type of measured move, and that is using the base of the last upward leg, so I’m going to use this point here at around 3750. We use the peak of the previous run, come back to the low of the pullback, and then that projects higher. So, that would be an equal-length rally. And interesting is that this shaded blue area coincides with the width of the measured move from the triangle. So, maybe that’s saying we do have some more upside in this move towards 4200, which also happens to be a resistance point which I spoke about last week. So, some interesting things going on there.

I think that just going back to our daily chart, coming out on Friday in the U.S., we’ve got the jobs report coming out. The question now is, can the S&P break higher above this trend line on its first attempt, or will there be some consolidation? Do we get a pullback and maybe some more work before another attempt at breaking upwards in a week or two? So, I think tonight’s report will give us some indication as to which way that’s going to go. I think the play here at the moment, regardless of what happens tonight, I think the play here is to hold long positions. If you’ve got long positions which have been established during this upward move we’ve had from the lows, and this is something we have spoken about in previous week. If you do have those long positions, I’d be hanging onto them. And that said, though, I’d be hesitant to add to my S&P 500 exposure at this current point because we aren’t right at a resistance point, so buying at a resistance point isn’t really a strong risk-return or risk-reward idea.

And when I look at the Dow, just going quickly over and looking at the Dow, it really is at the upper reaches of this resistance band, so this big resistance band at around 35000 roundabouts. Big resistance band which the market is currently testing into. And I look at this, it’s about 21% in six weeks. It’s really stretched above those moving averages. To me, it just doesn’t seem like an asymmetric entry point. I said the same thing last week. We started to get a pullback, but then we had Fed Governor Powell’s comments and the market shot higher again. But it doesn’t change my view that I think this rally needs to be checked. I think it needs to pull back, at least a moderate pullback to give these moving averages time to catch up. That would be quite normal price action. And so that’s why I’m hesitant to be adding market exposure at current levels. I think there’s near-term limitations on how much higher this market can go.

So, yes the price action is certainly encouraging, but I just don’t want to get too excited too quickly. It’s really interesting really when you think about it that when the market’s running it always feels like you don’t have enough exposure. You’re always thinking, “Geez, I wish I had some more. I should have bought more when it was at lower levels.” But just got to remember how you were feeling at those lower levels. Just remember back six weeks ago. And people were just so fearful. People thought a crash was coming. I saw all these chart overlays and analogs showing that we were going to have a repeat of the 2007 crash. And as you’d know, I spoke a long time about how that was probably not the most likely scenario. Nonetheless, that’s how people felt. So, when you think, “I wish I had some more exposure,” if you got any exposure at all, I think you’re really doing well. And one of the things I said back during probably mid-October, I was saying I’d rather be a little bit right with some exposure than 100% wrong with no exposure should the market start to rise. And that remains the case now. I think having some exposure, looking for good risk-return entry points is the way to play this.

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Now, let’s move on to a couple of indicators of interest. The first one is the number of S&P 500 stocks above their 20-day moving average. And we looked at this a bit last week, and it remains pretty much the same situation today, but I just want to look at it from a different perspective as well. And this is one of those other things which suggests to me that maybe the market can pause before breaking through this trend line which we have. So, of course, I’ve got the S&P 500 up here above, number of stocks above their 20-day moving average below. And what we’ve been conditioned to expect over the last 11 months now is when this indicator gets to a high point it tends to coincide with sharp declines. That’s not always the way. It’s always important when you look at an indicator to look back in time, look back further than the last 12 months, see how it’s performed over different parts of the cycle.

I want to draw your attention over to this point here. This is coming out of the COVID decline. So, I’ve just marked these three points here. So, on each occasion, you can see the number of stocks got up above 90%, number of stocks above the 20-day average got up above 90%. Look what the market did at each occasion. Very different to what we’ve been experiencing this year. It resulted in pauses and mild pullbacks. This is the thing which I think could potentially happen maybe over the next week or two. Of course, I don’t know, but we’re just looking at indicators and trying to interpret the price action and trying to see what could possibly happen. There’s also the possibility that we saw on this third time it triggered back in 2020. It stayed locked in this position for several weeks and the market continued running.

So, of course, there’s no guarantee that just because this indicator is high the market has to pull back. It could break the trend line and continue running. It’s not my favorite view, but it’s one of those possibilities that, of course, we need to be aware of. And that’s why I say if you’re holding positions, I think you want to keep holding them. You don’t want to be too clever. Try and take profit, try and buy back at a lower level because the market can sometimes run and you jump off the bus just as it pulls out for another run. So, really interesting what’s I think happening in this indicator. And with the Dow so far above those moving averages that I was showing you over here, I think the scope for a pullback and seeing this indicator come back, the number of stocks above the 20-day moving average pullback, I think that possibility is…I think it’s increased.

So, now I’ve got one more indicator I want to show you. And this is a really interesting one. It’s looking at the market again from a different perspective. This is a number of stocks above their 50-day moving average. And what this one is all about, so let me explain what’s going on here. So, there are a couple of trigger points with this. Down here, this lower black line, that represents 10%. So, when the indicator falls below there, it’s telling you less than 10% of stocks are above their 50-day moving average. So, it starts the triggering. It starts the triggering process, and then the trigger is released when the market gets up here to more than 90% of stocks being above their 50-day moving average.

Now, I’ve marked the times, and this goes back to 2010. This is far back as the data I have goes. I’ve marked all of the occasions when we’ve cycled from less than 10% to more than 90%. And that’s represented by these black vertical lines. So, you can see there’s six occasions, well, they’re actually seven if you include the current one because it’s just triggering again now. What you see is, initially, you might think, “It’s up above 90%, so it’s going to pull back so the market’s going to pull back. But that’s not what this one is all about. This is telling you about market breadth. It’s telling you about the underlying strength of the internals of the market. What tends to happen once this triggers with going from less than 10% to more than 90%, look what the market does. It tends to continue rising as it has on these previous occasions. Doesn’t necessarily rise the next week. You can see here there’s a pullback then the market continued rising. But that’s the general trend that you see. It leads to further gains.

Here’s an aberration from the series because it triggered and then the market pulled back and retested those lows. But now we’re getting another signal now. So, this is not some sort of a magic indicator which guarantees the market is going to go up. I’m sure some people are going to leave me a comment saying, “Hey, the macro environment is actually different now because the Fed is tightening, it’s not easening.” And that’s true. It is a different macro environment. But the thing to remember is that this isn’t about macro environment. This is just a market indicator of breadth and we’re using that to try and get an idea of how strong the internals of the market are. And also, it’s just one piece of a puzzle. What we’re trying to do, we’re trying to bring many pieces of a puzzle together, and at this point, I think there’s enough technical evidence to justify maintaining some market exposure, and also looking for potentially some further upside through December and into January. But we’re always assessing this price action on a week-to-week basis because it is a very fluid situation.

So, hopefully, that was interesting. Hopefully, you got some interest out of that, and I look forward to coming back and talking to you again next week.

Please see video for more details analysis and charts

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Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.