SP500 Correction Deepens | Critical Levels | Episode 112

By Jason McIntosh | Published 24 February 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 Is the SP500 rally over and the bear returning?

03:34 Look what this internal indicator suggests

05:10 Do you make this classic mistake?

07:57 Don’t overlook this price action in the Dow

10:52 This is how I’m playing the Nasdaq


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, copper, and uranium in a separate video, and I’ll leave a link for that in the description section below. I’m also going to have a look at the Dow and the NASDAQ, 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 things are really starting to heat up over the last week. The bullish scenario that I’ve been speaking about over the last probably several months now is starting to get tested. And we have the S&P 500 pulling back towards these moving averages.

So, what I want to do, I want to go through some of the major indices, so the S&P, the Dow, the NASDAQ, and look at the structure and consider how we should be managing or how we could be managing this current situation. So, let’s start by having a look at the hourly chart for the S&P 500. Just get a little bit of detail on the most recent price action. What I want to look at, I just want to look at the last couple of days. And we can see that each time the S&P 500 has made a new low there’s been a quick snap back in the opposite direction. And again on Thursday in the U.S., we had a new low and then we had a snap back in the other direction. Of course, I’m filming this on Friday afternoon in Sydney, so we don’t have Friday’s price action for the U.S. yet.

But this price action that we’ve been seeing over the last couple of days, it does suggest that maybe this sell-off from last week is now starting to run out of steam and maybe we are getting close to a point where we’re going to get some sort of rally in the opposite direction. Tentative signs are buy the dip. Very early days. We want to see how this continues to develop, but maybe we are going to see some sort of bounce develop over the next couple of days.

Moving to the… Just coming back to the daily chart. And what I want to look at here is let’s start by putting on some Fibonacci retracements just at this rally from the December low going up to the recent high. And what we can see at the moment is that this pullback that we’ve been experiencing, it’s right back into that Fibonacci region now, right back at the 50% mark. And so far, I would say that the pullback from the February high, it does seem to be in proportion to the rally we saw from the December low. So, from that perspective, it’s looking like a typical corrective pullback. And we’ve also got this strong support level coming in through here at around 3900, just beneath this Fibonacci band. So, the bears still have a lot of work to do, I think, if they’re going to turn this around and start to send this market back to a new low.

Another thing I want to do, I want to put on an indicator. I want to put on an advanced decline line. So, this is the advanced decline line for the New York Stock Exchange. So, of course, I’m comparing it to the S&P 500, so not the same thing, but the price action aligns with both. And the point I want to make here is, so far, the advanced decline line, it is pulling back but it looks like a pullback. It doesn’t look like a turnaround in this momentum we’ve seen in the advanced decline line from the October low.

And what’s been interesting just over the last couple of sessions, you can see the advanced decline line made a low on the 21st which is…well, it’s a few days ago. And the S&P 500 has continued to decline but the advanced decline line has been edging higher. So, only a really short-term analysis of the advanced decline line. But even just in this short timeframe, there is a little bit of divergence coming in where the advanced decline line is rising while the S&P has been declining. So, I think internally, this is a positive sign for the market. I think it’s a sign that this may well be a corrective pullback from the high. So, it is an encouraging sign.

But I think now a big point I want to make here is that if these levels that I’ve been speaking about, the Fibonaccis, the 3900, if these levels start to give way and the market starts to fall down, break below these moving averages, if that happens, then I’ll close down risk. I’ll reverse my positions. Well, I won’t necessarily go short, but I’ll certainly close down long positions. I think a mistake that a lot of people make in these situations is that they have a view. And my view, as you know, over the last several months is that this market can continue to experience upside, not necessarily a new bull market, but I want to see where this momentum takes us.

And when people go on the record, they say things publicly, they go on YouTube and they say, “I think it can rise,” they then feel they’ve got to defend that position. And even in spite of maybe the market falling away, they’ll defend what they previously said. I don’t do that. If I’m wrong, I’m happy to say, “That hasn’t worked.” I’m going to say the opposite. I’m going to say, “I think the market is now vulnerable. I think it’s now falling.” I think that’s some hallmark of anyone who’s going to have success in the market. They don’t get locked into a view. They’re flexible in their thinking, their approach, and their positioning, and they can walk away from positionings and a viewpoint when it’s not working. So, I’m happy to abandon this notion that the market can continue to rise if the price action suggests otherwise, if we start breaking below these key levels around 3900 and maybe below 3800.

At the moment, that hasn’t happened. So, I think for now it’s a case of giving the upward momentum that we’ve seen the benefit of the doubt. I’ll be looking for a price action, maybe sloppy sideways price action, not a really strong buy-the-dip type of price action. And then if the market starts to roll from there, that’s when we’re saying, “Maybe we do need to look at the possibility that the bears are right and we do retest and break this October low in the months ahead.” But let’s just watch the price action. Keep an open mind because it’s not clear-cut by any stretch.

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Now, let’s jump over and have a quick look at the Dow. Dow’s been interesting. It’s been pulling back as the rest of the market has, but this is a scenario that we’ve already spoken about. We’ve been speaking about this scenario for at least two, three weeks now. We’ve got this overhead resistance in the Dow around 34,400 to 34,000, this blue-shaded area. Been quite a bit of technical activity in this region over the last year or so. And so it’s not surprising the market has been capped. It has stalled here. Also, got the Fibonacci region which is from the October low to the recent high.

And one of the scenarios which I was talking about, I think it might have been three weeks ago now, I said, “It may be possible that we see an A, B, C, so an A, B, C type formation or structure start to form where the market does come back and retests the Fibonaccis.” Looks like that’s what we’re doing now. So, as it stands, looking at the Dow, this remains a constructive price action. It’s not price action that suggests the market is about the plummet and break to new lows. Yes, that could happen, yes the structure could change, but at this point, the move from the December high looks corrective. It looks like an A, B, C zigzag correction back to where Fibonaccis are. So, keep an open mind with this, and don’t be too quick to throw out potentially profitable positions that you may have because we are having this decline. Declines are all part of the process. And we are below the moving averages. And one of the things I often talk about [inaudible 00:09:55] happens below moving averages, but it’s below declining moving averages, which I get concerned about. At the moment, this is a dip below rising moving averages.

Just to give you an example, I’m just going to go back to a period in 2016. So, just this period here, we had a strong rise off lows. We had a sideways consolidation, market had a sharp dip below the moving averages, and then sprang back. That can happen in a rising market. It’s not unusual price action. The price action I’ll worry about is when you have declining moving averages and you have prices sitting beneath the moving averages. That’s when the bad stuff often happens as it did on that occasion in 2015. But that’s not the price action we have at the moment. We have price action which is of rising moving averages and pulling back to a Fibonacci zone. So, let’s just continue to monitor this price action in the Dow.

And just quickly finishing up with the NASDAQ. Similar story to last week where the NASDAQ is working off a strong rally we had off the December low. We had a situation where in early February, the market had become quite stretched above the moving averages. And so the pullback that we’re seeing now it’s… Pullback in itself is not unusual. It’s not surprising. It’s something that I’ve spoken about.

Now, I pointed out four positives last week, and they’re still in place. And those positives remain that the moving averages, the 50- and the 100-day moving averages are trending higher, price is still above those moving averages. We have a market which has broken above the resistance point at around 12,000, and that resistance is now support which the marketer is sitting above. And we’ve got this reversal pattern, this bullish wedging formation which the NASDAQ broke out from in January and currently pulling back towards that breakout point. They’re the positives I mentioned last week. They’re still in place despite the pullback that we’ve had in the last week.

Now, of course, this does not guarantee a bullish outcome by any stretch. And this is a thing, nothing in this business is guaranteed. That’s why we use risk management strategies. If this move up from the December low fails and this market which is rolling over continues to gain momentum to the downside, it’s not about digging in and saying the market has to go back up because of those factors I just mentioned. It’s where we use risk management at capital and step out of the game.

And these videos, they aren’t about predicting what will happen. They’re about trying to identify possibilities, possible pathways for where the market could go, and then using those risk management strategies to manage those possibilities. I know this is a difficult time. It’s a difficult time both analytically and emotionally. There’s a lot of crosscurrents of opinion of price action, and it’s hard. Lots of strong opinion in the market has to go lower because of the fundamental picture of it that rates are rising. And we know the story well. And maybe that will happen. But at this time, I think it’s still a case for maintaining long positions that have been working. Not about holding long positions that have been falling for the last 12 months. It’s about holding long positions that have been working over the last several months, giving the momentum the benefit of the doubt, seeing if these support levels do hold, and if the market can rebound. Doesn’t rebound, it’s, of course, break, cut positions, move more into cash, take a more defensive stance. But that’s not the situation as it currently stands.

So, let’s leave that there. Hopefully, that’s been interesting. I hope it gives you a few ideas for how things could play out over the next few weeks, next few months. So, thanks for joining me. I look forward to coming back and talking to you next week. Until then, bye for now.

Please see video for more detailed 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.