Inflection Point For SP500 | Episode 73

By Jason McIntosh | Published 30 September 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

00:33 SP500 breaks June low (what it means for stocks)

03:39 Two possibilities to be ready for

05:26 A rare extreme you need to see

06:33 But does it signal an imminent low?

08:33 Watch for THIS price action to end the sell cycle


Please note: Charts available from video

It’s been another ugly week for the S&P 500 and global equities generally. The S&P 500 has continued to sell off since breaking down below support at 3,900 last week. It also briefly traded at a new low, so breaking below this low over here in June. Quite simply, the technical structure of this market remains weak. And we’ve got a market that’s sliced through a support zone and it’s now sitting on its lows, and it’s also below declining moving averages. I’m using the 50 and the 100-day moving averages. Make no mistake, this is a vulnerable market, and I think it really does warrant extreme caution at this current point.

Let’s go over to our four-hourly chart for a moment, just to get a little bit more detail on the last week’s price action. And so we did see a reaction. So, here’s the low. There’s the June low. So, the market did break below that June low. And then we got a reaction last week, and that reaction coincided with the Bank of England announcing that it was going to be supporting the bond market, coming in and buying bonds. So, that gave global equities a bit of a bid tone and we got a bit of a rally, and that raised the question about whether there was going to be other central bank pivots like the Bank of England where they’d set the lead and then the Fed was going to pivot and other central banks would pivot, so it’d put a briefly more positive tone into global equities. But that doesn’t seem to have lasted too long with the market retracing all of those gains.

At this point, I’ve got to say the overall technical structure, it remains weak. That’s not to say that we can’t get a double bottom forming. So, we’ll go back over to our daily chart for a moment. It’s not to say that it’s completely out of the question that we get a double bottom form around current levels. But the thing to remember is there’s nothing certain in these markets. Whilst this is a bearish-looking chart, the setup doesn’t necessarily have to lead to an ongoing decline or even a crash. There are other scenarios that could lead to an unlikely but sizeable rally. A crash or a sell-off are just possibilities, but I think they’re possibilities that we need to be prepared for with the market in this current state of vulnerability.

I think the way the market currently is set up, I think it’s got the potential to really be a pivotal moment. I think what’s likely to happen over the next few days is that we probably do see a retest of this low from Wednesday.

The market is most likely I think to retest that low. And if that happens, then it’s the case of what happens then? Is it going to be a case the market breaks and then continues to sell off and gathers momentum on the downside? Or do we get a completely different scenario? And this is a possibility I’ve seen quite a bit over the years with markets in that maybe we get a test of this low from Wednesday then maybe there’s no more selling, maybe there’s no follow-through selling. And when that event happens, the market will then usually quickly rebound above the breakdown point. It starts to trigger short covering and then that opens the potential for that to lead to further gains. That’s not a prediction that’s going to happen by any means, but it’s one of those possibilities that we always need to keep in mind.

I don’t know which way this is going to go. I don’t know whether it’s going to be that more positive scenario or a continuation of the current bearish decline. But what I do know is that this is a time for caution. Yes, sentiment is about as bad and as bearish as you ever see it get, and yes, stocks are very oversold.

Let me just show you how oversold they are. This is showing the number of S&P 500 stocks below their 200-day moving average. And this blue band is showing you from when it gets down to around 15% or fewer stocks above their 200-day moving average. So, you can see where we are now. There’s about 11% of stocks that are above their 200-day moving average. And that’s about as low as it gets. This goes back to 2007. This is a weekly graph. And barring this period during the GFC usually doesn’t stay down here for too long. You don’t know with these oversold indicators because the market can always get more oversold. So, this doesn’t mean that the low is imminent by any means, but we do know that we’re in the territory where a low can form. So, it’s about keeping an open mind that different things can happen.

Going back to our daily chart. We’ve got an oversold market, excessive bearish sentiment. And these are normally things that we’d look for when we’re considering the possibility of a low. But despite those factors, it still remains a vulnerable setup. We just don’t have the price action at the moment. The price action at the moment doesn’t give us the set-up to put a reasonable probability on a bullish scenario. I know that people like to call the low, but I think that’s just full of risk with how the market is currently set up.

And let me just say this, the big money is made by identifying trends and then staying with them. It’s not by trying to pinpoint the low. People who try to pinpoint lows…all the way down, people are pinpointing lows, they often get run over. So, it’s not about pinpointing the low. It’s about identifying the emerging trends and running with them. So, while this does have some of the makings of a potential low, we just don’t have confirmation from the price action. I think this is poised in a way that really could go either way. And we just need to be cautious, stand back, and let us see how the market plays this current setup.

I think the first step in breaking this current sell cycle would be breaking back above this resistance at 3,900. And we can also put some Fibonacci retracements on for this last decline. And you can see they all come in. They all seem to cluster around this 3,900. I think that’s quite a key marker if we’re looking for potential turning points. We could have a case where the market rallies 5% from here. We could have a case where the market rallies back to 3,800 then turns lower again and then makes new lows and continues to decline. I don’t think this market is out of the woods at least until we can get back above this resistance band. It’s quite feasible that we a 4% or 5% rally, and people think, “Oh, that looks like the market is starting to rebound.” But unless we can get through that resistance, it could still easily roll over, so that’s why the caution is so necessary. I think it’s now a case of let’s just wait and see where the market goes from here. Jumping the gun and trying to buy early, I think it just carries too much risk in my view.

And if you’re buying into a market when it is at a vulnerable point, you greatly increase your risk of losing capital. So, I think now is the time to protect your financial and your mental capital because your mental capital is just as important because opportunities will emerge at some point and the people who are going to be best able to capture them are the ones who are mentally and financial still in good shape. And we want to be ready to take those opportunities when they appear. So, I think, for now, let’s wait for the price action to tell us when the risk reward is in our favour. That’s when we want to play. We don’t need to play at the moment. Wait until probability and the reward justifies getting involved.

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.