SP500 Bulls Hold The Line | Episode 117

By Jason McIntosh | Published 17 March 2023

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 Biggest change to SP500 chart this year

03:24 This is what I don’t like about the recent price action

04:30 SP500 hourly chart tells a fascinating story

07:22 Is this the start of a GFC style collapse?

09:44 This is why I’m not rushing to sell

11:38 Look what this key sector is doing (it’s not what you think)


Please note: Charts available from video

This week’s video is going to focus on the S&P 500. I’m going to cover the ASX 200, copper, gold, and uranium in a separate video. I’ll leave a link for that in the description section below. I’m also going to discuss the possibility of a big market sell-off just getting underway, so make sure you stick around for that. As always, this is general commentary. It doesn’t take your personal situation into account. With all of that said, let’s get into our first chart.

So, we’ve got the S&P 500 up on the screen. And it’s really been a week of some pretty big developments. And I’ve spent a lot of time just going through this price action, going through all the markets trying to put together a line of analysis that might be able to help you with structuring your own portfolio and help in giving you some idea of the possibilities and some understanding as to what the price action could be trying to tell us.

And it really is a difficult time. It’s a hard time for… I’m having a hard time trying to piece all these things together because there are so many moving parts. So, I’m sure you’re finding it a difficult period as well. And off the bat, I’m not interested in buying this dip at the moment. I don’t want to buy the dip. But equally, I’m not about to join the bearish extreme and say, “Got to be 100% cash. There’s a big crash coming. We’re going to get short the market and just brace for the worst.” I’m somewhere in between, and I’m going to go through that in this video.

And so let’s start by addressing… The best thing I want to do, I want to address this trend line which has been a focus point for around a year now. I think with the market pulling back this far, I’m prepared to say, “This is now a false break.” We had a false break in January. The market ran for several weeks, and then it’s reversed back down. I don’t think this trend line adds a lot of value now. So, I’m going to remove that from the chart going forward. And the skeptics will say…they’ll say, “Hey, that was ridiculous. You had a line on a chart. It didn’t mean anything. You got excited when it broke up and ended up doing nothing whatsoever.” But I think anyone who thinks along that line, I think they miss the point of what technical analysis is all about. None of these lines, none of these moving averages or supports or trend lines, none of these are magic lines. They don’t tell you, they don’t predict, preempt the future, or anything like that. They’re simply reference points, and they’re reference points that we then use to manage risk.

When we did have that breakout in January, we had upside momentum in the market. So, that meant that there was a case to put on risk for the upside and see where that momentum went. So, that momentum, it could have continued to go up, so that works out well. But then we have a risk management plan for the eventuality that it doesn’t, and then we can start to close out positions and pull back risk. That’s what these lines… This is what technical analysis is all about. It’s not about predicting the future, it’s about reference points that we can manage risk around. And what we have now, we have a situation where the S&P 500 is retesting this key support at around 3900. Technically active area for many, many months. And I think this is a key area over the next few days, maybe over the next few weeks. We’ve got to see how this plays out.

What I don’t like about this week’s price action is the amount of time the S&P 500 is spending below the moving averages. I’ve got the 50 and the 100-day moving averages. And the moving averages are also starting to roll over. They haven’t crossed to the downside yet, but if the market hangs around this 3900 area for much longer, they will get close to crossing. And as you’ll know, if you’ve been watching these videos for a while, a market is at its most vulnerable when it’s trading below declining moving averages. So, this is something I think we need to watch closely, notwithstanding Thursday’s rally which has come off the support. It’s still sitting here below these moving averages.

Now, I want to go over to the hourly chart and get some finer detail on the most recent price action because it’s really interesting. It tells a fascinating story of what’s going on. So, this is the price action since the beginning of March. And through this second half of the chart, we’re picking up last week. What I’ve found really interesting is that as a low point has been broken, market gets to a new low, hasn’t stayed there for long. It’s then had a snap-back rally. Market has come back down on…

So, the first break of a low, was on Thursday the 9th, then we had another break lower last Friday with a snap-back rally, another break lower on Monday with a snap-back rally. Coming over here to Wednesday, again, a break below some of these low points from the previous week, snap-back rally, and then that’s continued over the Thursday session. So, it’s a situation where we’ve had successive attempts of causing a breakdown, triggering stop losses, and attracting follow-through selling. But each one has resulted in these snap-back rallies. So, it’s like we’ve had these waves of bearishness which have so far all been repelled and we’ve had higher prices.

So, the question is, is this price action we’ve been seeing setting up for a larger short-covering rally which sees the market rally into the new week and potentially beyond? Or are we going to get other…? The bull is going to eventually get fatigued, and will the bears run over the top of them? And that’s what we don’t know. We can’t be sure which way this is going to go, but that’s the battle which is currently being fought.

Now, I want to go back to the daily chart, having said that and gone through that price action. What I think is really important to watch is watch this level here at around 3800. Marks the low from, what’s it? The December low. I think if we have another wave of selling which can get beneath last week’s lows, can get to 3800 and breach that, that’s what would then I think open the doors for an acceleration or an intensification in the downward price action.

But, of course, that hasn’t happened yet. It may not happen. Support is still holding. That’s just understanding the importance of, firstly, 3900 and 3800 beneath it where we could see downward selling, downward price action accelerate. And now there’s also a lot of concern. I’m seeing a lot of concern across the internet and across user feeds generally about the concern around these bank collapses as being a potential trigger for another GFC-style event. And I want to go through some charts with you in a moment, and I’ll just tell you what I think and what my take on the price action so far is.

But, first of all, if you’re getting some value from this, please hit that like button. Please leave a short comment, just “Hey, thanks for the video.” It tells YouTube you’re watching, and YouTube will then show other people. And hit that subscribe button if you haven’t already. And, of course, visit me over at Motion Trader, especially if you’re interested in ASX stocks.

Now, let’s move on to our first chart in this series I want to go through with you. This is S&P 500 equal-weighted index. And this one here is a cause for some concern I think in that it’s already broken below, its December low point, and it’s below these moving averages. It’s fallen quite abruptly last week. It’s a big fall below the moving averages. Moving averages are rolling over. So, at the very least, I’d say there’s been quite a bit of technical damage done in the past week in the S&P 500 equal-weighted index. And I think at the least, it’s going to take time for a base to form, for it to stabilize before it could potentially start to round higher.

And it is interesting in that the equal-weighted index has really been…over the past maybe few months, it’s been positive in that it’s been an indicator or a broad base strength within the S&P 500, generally, in that it’s been an indicator that a broad base of those S&P 500 stocks have been rising. What is it telling us now? It’s telling us the opposite in that it’s weaker than the S&P 500, which, of course, is market cap-based. And this suggests that the S&P 500 is really being held together by a few of the big-cap stocks, which is not really a positive. You want broad-based market participation. So, this is cause for concern.

Now, having said that, I want to contrast that with the NASDAQ. And last week, I was saying that the NASDAQ wasn’t aligning with the Dow, wasn’t aligning with the S&P 500. And that remains the case today. The NASDAQ is one of the reasons why I’m not rushing to sell my entire portfolio. It’s doing something very different. And it’s hard to see a big market sell-off occurring without the NASDAQ participating. I don’t think there’s a… I can’t think of a precedent where we’ve had stocks selling off aggressively with the NASDAQ rallying.

And then if we look at a stock like Apple, which is the largest stock in the NASDAQ, on Thursday, it was breaking higher. The moving average is a positive. The market is bouncing off a Fibonacci retracement region. So, I’ve measured from the December low through to the February high, came back to the 38.1, and is rallying again. This isn’t a stock which is set up for a big decline. That’s not to say it can’t happen and it won’t happen as time passes, but as we currently stand, this is not set up for a big move to the downside. The same goes for Microsoft, which also on Thursday, broke upwards. Moving averages are positive. It had a rough 2022 like many stocks, like most stocks, but it’s not selling off now, and it’s not set up for an imminent decline.

So, these are important things to take into consideration when we’re considering, would these bank failures lead to a big decline over the next week or two? At the moment, what I’m seeing in these big-cap stocks, it suggests that that’s probably not the most likely situation.

Also, another interesting thing which we don’t often look at is the home building sector. So, this is an ETF for the U.S. Home Construction. And during the GFC, during 2007, 2008, this was one of the first sectors to go. It got decimated. Look at the price action now. Home builders didn’t make a new low in December with the broader market. It’s been rallying. Well, its low was back in June. Hasn’t made a new low since. And in the last few weeks, last couple of months, we’ve had a pullback to the moving averages which are still trending higher. So, again, it doesn’t look like it’s set up for an imminent crash. There’s a lot of stuff going on in this market. There are a lot of pieces to put together. It’s not just as simple as pulling up a chart of the S&P 500 and saying, “Hey, this is what I think is going to happen.” It’s a lot of moving pieces that we need to consider.

Just lastly, I want to have a look at the Russell 2000, which is the small-cap index. Now, a lot of technical damage was done last week with this decline that we saw. This is an index which had been looking good. This had been the focus point. This contracting trading range had been in place for around six or so months. And we had a breakout in early January. Started to get a run. It looked like this was a stepping stone to moving back up towards those highs from 2021, but that hasn’t been the case. The market has since turned lower, well below the moving averages. Moving averages are rolling over as well. So, a bit like the S&P 500 equal-weighted. Not good in terms of market participation.

I think maybe… So, the focus point had been this trading range, but maybe that wasn’t the complete pattern. Maybe I’m thinking now that this is more what we should be looking at, that the market… And you can draw something similar on the S&P 500. Maybe it’s more of a case of we’ve got this big sideways trading range which is continuing to build out. So, it may not be a case of will the market go up or will it go down? Maybe it’s a case that we could get several more months of whipsawing price action within this broader range.

So, it’s just the thing with these markets. They’re not clear-cut. There is certainly risk which needs to be managed at the moment, and I don’t think now is a time for strong high conviction opinions. Either way, it’s a case of honor this price action and let’s roll with the price action that we get dealt, rather with our opinions of where we think things should be because that’s often when you get into trouble, when those opinions don’t pan out.

So, thanks for joining in. Hopefully, that was helpful. Hopefully, it gives you some ideas. And I look forward to joining you again next. Until then, bye for now.

Please see video for more detailed analysis and charts

Looking for the best ASX stocks to buy now?

Motion Trader‘s algorithms scan more than 2,000 ASX stocks daily in search of medium term investment trends. We then tell our members precisely when to buy shares. And most importantly, we tell them when to sell.

Try a no obligation FREE 14-day trial of Motion Trader, and see what an algorithmic trading approach could do for you.

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.