Investors Bet on SP500 Crash | Episode 96

By Jason McIntosh | Published 23 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

00:34 Watch this pivotal level in SP500 (this is important)

03:10 The bearish SP500 scenario you need to know

06:16 But keep an open mind. Few people suspect the SP500 will do this.

09:24 I’m doing this with my portfolio

10:00 This is why most people could be wrong


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, gold, and copper in a separate video, and I’ll leave a link to that in the description section below. I’m also going to tell you about two scenarios, and I’m going to explain the price action to look out for, so make sure you stick around for that. 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, here we go. We’ve got the S&P 500 up on the screen. And this is getting really, really interesting. So, last week, I was talking about the break we had. We had this… Been watching this support resistance band around about 3900 for several months. Goes back to around May. Lots of activity around this area. So, last Friday, the market broke down beneath that. And in last week’s video, I was talking about how that opened the window for potentially more selling and more consolidation.

And let’s go over to… What I want to do, I want to go over to the four-hourly chart and just have a closer look at that price action that we saw. So, here’s a break last Friday. Market tried to rally after that into the resistance band, failed, fell away, had another attempt at rallying midweek, and then has fallen away again. So, it’s had a couple of attempts at getting back in there, but in both times, that resistance band has sorted the rally.

Now, we can also fine up this resistance band a little bit more. Just looking at the most recent price actions. Interesting to just put this little band through here. You can see there’s several touchpoints into this region. That’s at around 3920. So, that’s a key point to keep an eye on over the next week. I think it’s a real pivotal area, and whilst the market remains beneath there, I think we do need to be prepared for lower levels. If we do see the market pop back above that resistance point, well, that really does start to brighten the picture somewhat. But that’s not where we are at the moment. So, we need to be on alert while the market is trading below that resistance.

Now, let’s just go back to the daily chart. And with the daily chart, the other points to note are that the price is currently trading below these moving averages. Now, I’m using the 50 and the 100-day moving averages. And as I often say, when a market is trading below the moving averages, it’s a point of vulnerability. It’s where we really need to be careful because the bad stuff tends to happen when the price is below those moving averages. So, that’s where we are now. So, we do need to be on alert.

Now, let me just map out a couple of possibilities where things could go maybe over the next month or two. And now these are just possibilities. They’re not predictions. And I know some people want predictions. They want to know what is going to happen, but I don’t know what is going to happen. So, unfortunately, you’re at the wrong channel if you want a prediction because I don’t make them. I talk about possibilities because I think the possibilities help us prepare for what could happen and then we use our risk management strategies and our profit maximization strategies to work with those possibilities.

So, let’s just go through what price action I’ll be looking carefully for over the next few weeks. So, starting on the bearish side, this is what we don’t want to see. If the market falls away reasonably quickly from current levels maybe over the next week, comes back down, and gets close to this low point from October, I don’t expect the market is going to carve through here in one go. I’m not expecting a move like that. This is a significant low point here. There’s also support from this previous low back in June. If the market does come back towards here, I’d expect it to at least pause. And if we then start to see price action which is quite anemic, doesn’t really do much, can’t really get off the low, and just hangs there for…it could be a few days, you need to see what happens, but maybe just a short consolidation. That’s when I think things go on high alert. That would be a telltale sign the market is getting ready for a larger decline, a break below a previous low then would really start to potentially unleash some significant downward momentum, and that’s where we could see the market fall away quickly. So, what I’m looking out for, I’m looking for a fall towards the previous lows from October, and then a shallow sideways grind and a break below that. And that’s when things could get ugly.

So, to give you an example, just going over here. This is the GFC decline in the S&P 500. Are we around here, for instance? Does the market come back towards previous lows? In this occasion, it went beneath it. Maybe it pulls up short of it then start to track sideways, and then it could really open a way to the downside. That’s the fear of a lot of investors. A lot of people are fixated on this period from 2008 thinking, “Well, we’re going to have a rerun of that.” They think this is a roadmap for what’s about to happen in current time. I don’t necessarily agree with that. I don’t think we can look at the GFC period and say that’s our roadmap, but that’s the price action which could develop. And we need to be aware of it and we need to be prepared to manage it should that happen.

Now, I want to go through another possibility. So, this is a more positive scenario. And say we do see some weakness over the next week or so but then the market consolidates, and rather than just sit quietly, it does then reasonably quickly kick back up in an impulsive manner, so we get a swift to move up. And then that opens up the possibility for short covering and for a push above these previous resistance points and this downward trend line. And if you’ve got a chart, I think I spoke about this last week, it could potentially be forming an inverse head and shoulder. So, that’s the head of the pattern, then you have what we call the shoulder, the left shoulder, and the right shoulder. The psychology of the right shoulder is that it forms when the market declines, people start anticipating a new low, they anticipate a breakdown to lower levels, but there’s not enough follow-through selling to make that happen, and then those anticipating the decline, they cover their shorts and then the market pushes upwards. That’s a distinct possibility that we could see play out over the next month or two. Again, not a prediction. Something to watch for. We’ll see this unfolding in the price action if that is indeed what starts to happen.

And by the way, I want to stress that should something like that happen, that’s not suggesting we’re in a new bull market. This could simply be an extension of a larger corrective phase which sees the market rally back up for maybe the first quarter of 2023, and then it could still roll over again later in ’23. But that’s getting well ahead of ourselves. It’s just talking about how these things could develop. A move up doesn’t necessarily mean a new bull market by any stretch. It could just be the market making it as difficult as possible for as many people as possible.

Now, I’m leaning towards the more positive scenario. I think this could still be part of a larger basing pattern even if it’d only be an interim basing pattern that takes us midway into next year. And I think the obvious call is the market needs to fall due to the awful macro environment. There’s no secret. The macro environment is awful. We’ve got raising rates, we’ve got inflation, we’ve got geopolitical issues, we’ve got wars. It’s a really ugly environment. And logically, talk of recession. Logically, the market is going to fall, but what everyone thinks is so logical isn’t always the way things play out. And often when people are all thinking one way, something completely different happens. So, that’s why I say be aware of other possibilities. Let’s see how this price action develops, and let’s see if there’s any follow-through selling from current levels. I’ve still got my S&P position which I put on after the CPI a couple of months ago. As I told you last week, I’m also holding individual stocks, but I’ve also got plenty of cash. For me, it’s not all or nothing. It’s a case of foot on both camps but I very, very much have an eye firmly on the exit should this start to unravel.

Now, if you’re getting some value from this, please hit that like button, leave a short comment, “Hey, thanks for the video.” It just tells YouTube people are watching, and then YouTube shows other people. It helps me heaps if you can do that, like and comment. Please do that, and hit the subscribe button if you haven’t already.

Now, just quickly, I just want to show you what I think the biggest problem for the bearish camp is at the moment, the people who are expecting this market is about to fall away. I think the biggest issue for the crash scenario is the Dow because the Dow currently isn’t set up for an imminent return to bearish conditions. Just to quickly show you, this is the Dow during the global financial crisis, the GFC, during 2008. It very much looks in sync with what the S&P 500 looked like at the time. The Dow wasn’t doing its own thing. It was falling away with the rest of the market. That’s not what we’re seeing at the moment. The Dow doesn’t have that same bearish structure. It’s not to say it won’t develop, but it’s not there at the moment.

The current pullback we’ve seen shouldn’t come as a surprise because we’ve been talking about it over the last three or four weeks, really, as the Dow shifted from below the moving averages to above the moving averages, it just got stretched, it needed a pause, it needed to consolidate, and that’s what we’ve seen. The price action has now come right back towards the 100-day moving average. And it’s also interesting we can put some Fibonacci retracements on this just from the lows up to the highs and really back around the 38.2% retracement which is the upper boundary of the Fibonacci retracements. So far, it’s playing out in a corrective and a constructive way. There could still be…it’s likely. I’d say there’s still likely corrective consolidative work to go, and we want to see how that price action develops again.

But at the moment, I’d say that’s the most likely scenario. It just doesn’t seem set up for a significant decline. Moving average is still positive, and we are still above the moving averages. So, that would suggest maybe it does lean towards that scenario where there’s a basing period playing through. But make no mistake, the S&P 500, it is vulnerable. The S&P 500, it is vulnerable whilst it’s below these moving averages, whilst it’s below support.

Looking at some of the key stocks like Apple, Alphabet, Microsoft, Tesla, they’re all below their moving averages. Tesla is being sold off aggressively at the moment. So, this is where risk management is just so important. Know where your exits are, and I think keep away from stocks which are in clear downward trends. We’ve got to get through these places. We’ve got to get through these periods with good risk management. Protect our capital. Just stay away from those stocks I think which are in serious decline, but also hold your nerve if you’re in stocks which are in upward trends. Don’t be too quick to throw your best stocks out through fearing the worst scenario because the worst scenario might not happen.

Let’s leave it there for 2022. It’s been great having you with the channel this year. Thank you for your support. I’m only going to be doing one video for the next two weeks. I’m going to take a couple of weeks away, but I’ll still be checking in with you and letting you know what I’m thinking and what markets are doing. Thanks for joining me. Look forward to talking to you 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.