Don’t Buy SP500 Yet (Wait for THIS) | Episode 61

By Jason McIntosh | Published 19 August 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 Going?

00:00 Intro

00:35 SP500 has done what few people thought was possible

01:55 FOMO is back as high risk names surge

02:58 SP500 is at a tricky crossroad (the positives)

06:59 Why I don’t want to buy here (look what’s happened previously)

11:16 Amazing graph with 55 years of data (look what is says now!)

Transcript (abridged)

Please note: Charts available from video

So, we’ve got the S&P 500 on the screen. And overall, it’s been a pretty positive week. And I think it’s just amazing to even be talking about a positive week considering where we were just a month ago with the market down at around 3,700, close to testing its lows. And there were so many traders and investors that were positioning themselves for a crash. They were positioning themselves for a capitulation selloff. But as so often happens in the market, we’ve seen a completely opposite outcome. And I think that’s been to the surprise of many people. I think a lot of people would be surprised that we’re now trading up and around a close to a four-month high. But I think if you’ve been following these videos, hopefully, you haven’t been too surprised at all. As we first started talking about this possibility of a rally around the 2nd of July as the market started to lift off these lows. And that’s what being involved in the stock market is all about. It’s not about getting every call right, but it’s being aware of the possibilities.

And what we’re seeing now, which I think is so interesting, is that just over the last couple of weeks, there’s been a real sense of fear of missing out, a bit of FOMO starting to creep into the way a lot of people are seeing the market. And I think the reason for that is that memories are still really fresh of what happened back here after this March low, how the market took off and it never looked back. So, people see the current strength of the market, and I think a lot of them worry that maybe we’re going to do this. Maybe it’s going to be upwards and onwards and the market won’t look back. And there seems to be plenty of money flowing into some of those high-risk stocks that had big selloffs during this latest pullback. And so that’s going to be interesting to see how that develops.

And what I want to do now, I want to have a look at how things stand because I think it’s really important to point out that I think this is a really tricky point in this rebound. We’ve got fear of missing out coming in, but I think this is a really delicately poised point. You see, we’re a long way off the bottom. We’ve come a long way over the last four to six weeks, but even still, it’s too early to say whether we’re in a new bull market. It’s still entirely possible that this is a bear market rally.

So, I want to start to pull this apart by looking at some of the positives that I’m seeing. So, to do that, I’m going to jump over to a four-hourly chart. Four hours are great. They just give you a little bit more detail than you see on those daily charts. So, just looking at this, now there’s our June low, and we’ve got the ensuing rally. So, what we have, we’ve got a sequence of higher highs and higher lows all through this period. So, that’s a positive sign. And what we’re also getting is we’re getting the dips are being bought. So, whenever the market pulls back, there’s buying demand and all these dips. So, again, that contributes to the higher highs and higher lows. These are the building blocks of an upward trend. This is a price action that we want to see. It’s quite different to the price action that we were seeing not too long ago where it was a case of sell the rallies. Every time the market would rally, there was selling pressure. Now we’re seeing the opposite. We’re seeing buying interest on the way up. So, a couple of ticks there.

And the price action through here has also been impulsive. Another positive sign. So, impulsive price action is price action that moves up strongly and then consolidates sideways to slightly lower without having a strong move to the downside. So, we want to see impulsive price action to the top side as opposed to on the way down. We saw the price action was overlapping. It chopped around, it overlapped a lot, and it really wasn’t able to amount to any sort of a sustained rally. So there are positive signs.

Going back to our daily chart. And on the daily, we’ve got the current price. Well, it’s above the 50 and the 100-day moving averages. These moving averages, they’re turning higher. They haven’t crossed yet, but they’re looking like they could be moving towards that crossover point. Not there yet, but it’s looking encouraging. So, I think these are all positive signs, and that’s why I’ve been saying, I think over the last four to five weeks now, I believe that the right strategy has been to incrementally get some exposure to this market as it’s been rising.

Yes, this could be a bear market rally. We just don’t know. We’ll only know that in hindsight. But it also might not be. It’s also possible that this is the start of a new bull market, and in that case, we don’t want to be so focused on a bear market rally that then we’re left completely on the sidelines if the market keeps running because I’ve seen that happen to so many people so many times. It’s happened to me as well, so I’ve learned through experience not to bet the farm on one outcome. You’ve got to be able to incrementally move into positions.

But when I look at the S&P 500 right here and now, I just don’t think I want to be buying up here at this level. And the reason for this, I think we’re getting close to some sort of a pullback. So, when we look at this from these lows in June, we’ve had a 20% rally in around 6 weeks. So, that’s a big move off the lows. And so what that’s done, that’s relieved a lot of the extreme negativity that I was showing you on some of those graphs over the last six weeks, particularly through this period through July. You might remember I showed you quite a few graphs about how extreme the negativity was towards the market. And what I think has happened through here is a lot of the short interest has now covered, so the buying pressure that has been behind a big part of this rally has probably, to a large extent, now dried up.

And another thing I’m watching, I’m watching these moving averages because what often happens when the moving averages are trending lower and then they start to round upwards, and then the price gets up above the moving averages, what often happens is there’s a retest. You get a retest of the moving averages at some point not too far after the initial break above them. Market does tend to come back. So, I’ve seen this happen many times over the years.

So, I’m going to just show you a couple of quick examples. So, this is the market during the…There was a COVID crash, and then you had the recovery. Price got above the 50-day moving averages. It ran for a bit, but then it came back and retested the moving averages. Another example is over here in 2019 going into 2018 had the rally. It was another V-shaped recovery like the COVID recovery. Market got above the 50-day moving average, came back, and retested. Doesn’t have to be like a big correction or anything but just a retest. This lasted a few days, the market rallied again, then it came back and retested again just after the moving averages had crossed. The trend then continues upwards. Something similar happened over here.

This one’s a little bit different in that this is going back to 2011. You can find plenty of these examples yourself on the charts. Even works on individual stocks. You see this same price action. We had this downward period with the moving averages. They start to turn higher. The S&P 500 got above the moving averages. This time it came back and tested but then it did a bit more. It went below the moving averages. And that also happens quite a bit. And that was before a sustained upward trend started to develop and the price continued to run.

So, that’s something to be aware of with the current market in terms of do we want to be adding exposure up here after a 20% rally? And there’s a significant possibility I think that this moving average gets retested. So, even if this is a new bullish trend, I think the S&P 500, I think it’s getting close to that pullback. And if that happens, it’s then a case of watching how the market pulls back, watching how that pullback develops, and then that can help determine if we want to incrementally increase our exposure or whether we want to want to start to scale back.

Now let’s just quickly jump over to this graph. So, this is really interesting. Turned up in my Twitter feed during the week. It goes back to 1967. And it’s really interesting. It shows the relationship between the stock market and inflation. And so you can see all these buy and sell signals over the years. And when you consider this is over a 55-year period, it’s actually not that many signals. Now, how this works is a buy signal is generated when the inflation rate, the annual inflation rate dips below its six-month moving average. So, it doesn’t happen that often. It’s quite a slow-moving indicator. And what we can see when we move over to the current environment is that the inflation rate is sitting right on its moving average. So, look over here, year-to-date change is 8.5%, six-month moving average is 8.5%. So, it’s not going to take much to trigger a new buy signal.

And one scenario is that if energy prices continue to dip over the next few months, we could see a new buy signal sometime in the near term. So, this is just something interesting. It’s not something that I’m basing my portfolio on, but it’s an interesting study nonetheless, and as a reminder not to lock yourself into a single-minded view about what’s going to happen, particularly people who are just so focused on a bear market rally because there are other scenarios that can play out. So, I think successful trading and investing, it’s all about looking objectively at the data and then making decisions accordingly.

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.