SP500: Bull Market or Bear Market Rally? | Episode 59

By Jason McIntosh | Published 12 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 insights to the market’s next move. 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 SP 500 reversal catches many traders by surprise

02:00 Why the break of the June high is so significant

05:12 But watch out for this technically active area

06:45 You don’t need to be bullish or bearish (consider this)

08:36 Be extra careful when looking at graphs like this

10:45 The graph makes me wonder if I’m wrong

Transcript (abridged)

Please note: Charts available from video

In this video, I’ll be focusing on the S&P 500. I’m going to cover the ASX 200 in a separate video. As well as the latest price action, I’m also going to show you some fascinating graphs. They’re all about how people are viewing this latest rally in the market. I think you’re going to find them really interesting.

So, we’ve got the S&P 500 up on the screen. And it’s been another interesting week. The S&P 500 continues to demonstrate positive price action with the market extending to a new high during the week. So, what we have now in just 4 weeks, the S&P 500 has been able to pull away from this 18-month low, and we’re now up at a 3-month high. So, this really has been a significant reversal, and I think it’s caught a lot of people by surprise.

And I just want to jump over to the four hourly chart and have a look at this a little bit closer. And it’s interesting when we do this because what we’ve got now, we really do have a sequence of higher highs and higher lows. So, what happens on each pullback it’s been well-supported. All the pullbacks are being bought on the dip, which is a positive and constructive sign. And again, just in the last week, the most recent pullback has resulted in another move higher. And another thing which is interesting to note is this high here from May, the market has now broken above that. So, that’s another sign that the sell sequence has been broken.

Let me just jump back to the daily chart.

Another thing I like is that NASDAQ has also broken above its May/June high, which gives confirmation that there’s a reversal taking place. And what’s interesting to note here is that…So, you can see here, there’s the June high, and we’ve got the break above it. And then with the S&P 500, we had this high back here in February, and you can see the market actually broke above it there. So, it was similar in that respect to what we’re seeing now, but then, of course, it quickly reversed. What’s interesting, though, is that this break higher in March wasn’t confirmed by the NASDAQ.

So, let me just go over and show you the NASDAQ quickly. So, here we are here. Here’s the NASDAQ. Here’s the June high, which we’ve broken above now, but look at the high from back in February. You’ll see the NASDAQ never got back above it, so it didn’t give confirmation. So, while the S&P broke higher in March, the NASDAQ didn’t follow. What we have now, though, the NASDAQ is confirming this break above the June high, which is a positive thing. We’re seeing something similar happening in the Dow. So, this is the first time the Dow has broken above one of these previous significant highs. It wasn’t able to give confirmation at these previous occasions.

And also looking at the Russell. Russell’s broken above the June high. And again, it’s the first time it’s given confirmation by breaking a previous significant high because none of these have been….market hasn’t been able to get above those in previous rallies. So, this is the first time this year that all of these U.S. indices have broken above a previous significant high.

What this tells me is that I think anyone expecting that this rally is going to quickly reverse, my feeling is they’re going to find themselves on the wrong side of the market. That’s not to say that we won’t see more selling later in the year because this, of course, it could still be a bear market rally. But, for now, I think the path of least resistance…just jumping back to the S&P 500, at the moment, I think the path of least resistance is to the…it does seem to be upwards. And as I was saying, the dips are being bought on pullback, and I think what that does, it points to higher levels in the weeks ahead.

So, what should we be looking out for this week?

Well, let’s start by putting some key resistance areas on this chart of the S&P 500. And just casting my eye across here, I think we’d go around here, 4,300 to 4,200 is around the…It’s a big resistance band. So, we pick up some highs here. We pick up a low, pick up some more lows there, congestion through here, activity here, and then, of course, the June point. So, you’ve got a heavy overhead resistance band coming in between 4,200 and 4,300.

And we can also put some Fibonacci retracements on. I’m going to put the Fibonacci on for the entire move because I think this is a significant low and this, of course, is a significant high. So, that’s I think the correct place to do a Fibonacci retracement. So, when we do that, you see the S&P 500 is currently right here at the 50% retracement and at this resistance band. So, I think you could say that this is…and this is what I said last week. It is a technically active area through here and could also then be a very natural place…If the market’s going to pause to consolidate this advance, this would be a very natural place for that to happen.

Now let’s just clean this chart up a little bit and get rid of the Fibonaccis. And if you’re a regular viewer, you’ll know that I’ve been talking about incrementally getting back into the market over the last few weeks. We don’t know if this rally is the real thing. Could be a bear market rally or it could be the start of a new bull market. We just don’t know. Nobody knows, but what we don’t want to happen, I think, is being left on the sidelines should this prove to be a rally of significance, which does, over time, continue to move up.

So, this is the thing. You don’t need to be either all in bullish or all in bearish. Sometimes I think the play is to take the middle line. And in the situation we’re currently in now where we’ve had a significant decline, we are having a rebound. Could be a bear market rally, could be start of a new bull market. We don’t know. So, in this situation, I’d rather be either a little bit right by incrementally getting exposure to the market or a little bit wrong in that if it is a bear market rally, it’s not going to be a disaster rather than go all in one way or the other and get it completely wrong. So I think the big thing to remember is successful investing is often about managing risk. It’s not about being right all the time.

Now I’ve got a couple of graphs I want to show you, really interesting graphs. These turned up in my Twitter feed. And I generally like this type of sentiment graph. They’re really interesting in that it shows you how the market often responds when it gets to extremes. And one thing I want to point out with this, though, is that it’s an area where I think you need to be a little bit cautious when you look at these graphs. Not that there’s anything wrong with the graphs, just in the way they’re often interpreted.

So, you can these three green circles highlighting these points. And when you look at this and then you cast your eye up, you can see that they mark the point of significant rallies, and it’s then natural to look at these and infer the…well, will the S&P do the same thing here? Market is starting to move up. Maybe it’s going to be a repeat of this where it’s straight up to a new all-time high. And that could happen, but there are other possibilities. We could also be…Let me find it. We could also be at this point here. So, a similar level to where we are now. Market had fallen a lot, market starts to rebound, but unlike these previous points in 2019 and 2020, the market rebounded, which is just to here, and then it completely fell away again, and it got to more extreme levels.

So, it’s just saying to be aware when you look at these charts. Just understand that there are other possibilities. So, these graphs are great, but just don’t focus in on the areas that suit your view. Also, look for the times when they give you a different result and something different to what you were expecting. And then that then helps you manage your risk, basically, and that’s what keeps your capital mostly intact when things go wrong.

And I’ve got one more graph for you. It’s a really interesting one as well. It’s from the guys over at SentimentTrader, and they put out some really interesting stuff worth going over and having a look at. So, this came out in their email, free email, which they send out to people on their email list. Turned up in my inbox through the week. And what this shows, this shows the number of news articles mentioning bear market rallies and the number of news articles mentioning new bull markets. And then, of course, we have the S&P 500 up on top. And, of course, all the talk at the moment is about bear market rallies. And what so often happens when there’s such one-sided talk of bear market rallies, the market tends to be rallying in the real thing. So, I don’t know whether this is a bear market rally or not.

My favourite view is that this actually is a bear market rally, but I look at a graphic like this and I can see that so many people agree with me. So, that makes me wonder, are we all wrong? Maybe the low is in. It is a possibility that we need to consider. And I think one of the most important things for any trader or investor to remember is that we need to respond to what the market’s doing, not what we think it should do because so often the market, it goes along and it does what we don’t expect. That’s why I think the play at the moment is to incrementally get some exposure to the market, and if the market does reverse course, well, then, of course, we have an exit strategy, but if it keeps going, well, then you’ve at least got a foot in the door and you have some exposure should the market keep rallying because, of course, that is always a possibility.

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.