This Signal Predicted The Last Bull Market | Episode 88

By Jason McIntosh | Published 25 November 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

00:30 SP500 has only done this three times since March (why it matters)

03:29 Key hurdles the SP500 needs to overcome

05:13 Should you buy the SP500 at current levels?

07:03 What the Dow is telling us (and why you need to know)

10:48 Don’t misinterpret this indicators extreme reading

12:42 This indicator has a 6 out of 6 strike rate (it just gave a new signal)


Please note: Charts available from video

The S&P 500 is really shaping up as a very interesting chart. It’s actually one of the few times this year that the price is actually above the moving averages. You can see we had a brief period in around August, a brief period in around March, but most of this year has been spent below the moving averages. So, this is interesting that we’re above the moving averages and so far we’ve stayed there. The moving averages haven’t crossed yet. We’ve got the… What I’m using, I’m using the 50 and the 100-day moving averages. They haven’t yet crossed, but they are trending upwards. And if the price action remains constructive over the next few weeks, we may well find that they do cross fairly soon.

Now, what has happened here? So, what we’ve got, we’ve got this. This is the CPI released a couple of weeks ago. We had the strong move higher, got a break above this resistance band around 3900, and over the last week, the price action has been encouraging and has been constructive in that we’ve just traded sideways in a narrow band above support and holding above those moving averages.

And so let’s just jump over to the four-hour chart, get a closer look at this price action. And what we see when we look at the four-hourly chart, what I like about this is that the moves higher have all been impulsive. We’ve got impulsive moves higher, and this current consolidation is sideways, so it’s very corrective in nature, and that’s what we want to see. We want to see impulsive up moves, sideways corrective moves.

And also, interesting to have a look at the Fibonacci retracements just of the last move, just for this move from just around the CPI release to the recent high. And you can see the pullback has come back to just beneath the 38.2% Fibonacci retracement, so above the 50%, just below the 38.2%, so just in the upper reaches of that Fibonacci region. That’s encouraging, too, because it’s holding on to most of these gains so far. So, some positive ticks to give to the S&P 500 on the most recent price action. And I think that the longer the market can consolidate above these support regions, the stronger the base becomes, and the better that launching pad it develops for potentially the next move higher.

So, let’s go over to a daily chart. Just go back to this daily chart. And what’s important about establishing a strong base above this 3900 region is that there are a couple of significant technical hurdles above the current price. So, firstly, we’ve got this down trend line that’s been in place since back in January. We’ve got three touchpoints on the trend line. So, when you get three touchpoints, I call that a significant trend line. I see people drawing trend lines where they’ve only got two points, but I just don’t give as much credibility to those because you can draw two-point trend lines pretty much anywhere. When you get three points or more or you can combine it with a trend channel that you really have a significant line to pay attention to. So, that’s a hurdle coming up. We’re only about 1.5% beneath that trend line at the moment.

And just above there, we have a resistance band, comes in at around 4200. So, I’ll just draw that in here. It’s not a precise resistance region because you can see we’ve got overshoot here and overshoot here. But if we just tighten this graph up a little bit more, yeah, this is a point I wanted to get it. You can see it’s been a technically active region since going back to around April ’21. So, many times the market has been around this point and it’s encountered either support or resistance. So, I think we’d have to expect that it would remain technically important this time around if and when the market gets back up into this region. So, it’s a cluster of resistance points just above the market which are important to watch.

So, with this improving technical backdrop of the turning moving averages above support, the impulsive moves upwards. Given this improving backdrop, does this mean we should be buying the S&P 500 at this current level? And I think the answer to that is that I just don’t think that the current setup provides an asymmetric entry point. And by asymmetric, I mean an entry point where your relative upside is greater than your downside. With these resistance points so close to the market, it does potentially cap upside in the near term at least while this is still maybe tracing out a support base.

As I was saying earlier, this trend line is only 1.5% above the market. That’s like a day’s price action. It’s not very far at all. And lots of people are going to be watching this trend line, I’d say, because it’s been a significant trendline over the last 11 months now. And what I think could happen is that this could lead to…it could trigger a further pullback maybe back towards this 3900 support, maybe a longer consolidation. I think there are definite points to take on board if you’re considering buying the market now. You could be buying it at an elevated point after a big run, which does require some consolidation. And it may still work out quite well, but there could be that consolidation coming up. It doesn’t look set up to break at this very moment in time.

And another index I’m watching is I’m watching the Dow closely. I think this has been a fascinating market to watch in that it’s been the strongest of the U.S. indices, up about 20% of this low point from September, and then the October low, up about 20%. And the positive here is the moving averages have crossed. They’ve started to turn. They’ve turned and they have actually crossed to the positive, and that’s the first time. You’ve got to go back here since back in February, the last time that the 50-day moving average was above that 100-day moving averages, which is what you want for a bullish market. You want the shorter average, in this case the 50, above the 100. Hasn’t been the case since back in February. But the point of concern, for me, is just that the moving averages are…well, they’re quite a fair way below the current price. The current price is stretched above the moving averages.

Moving averages tend to work a bit like gravity. When a market runs from beneath them to above them, they tend to pull the market back down, or the market tends to pull back towards those moving averages. I’ll show you a couple of examples of where that’s happened in the past. So, just compressing this data up a little bit and scrolling back. So, this is the low point from the COVID sell-off. We had the strong rebound back up, got above the moving averages, then we had the return move pulled back towards those averages.

Looking again over here at 2019 at a big fall beneath the moving averages, the rebound back up above the moving averages, moving averages crossed, but the market was extended, again pulled back towards the averages. And you can do this yourself. Just scroll back and you find many examples. Here’s another one back in 2016 from below the moving averages, rallied up, moving averages crossed, extended, fall back. And this happens time and time again. Here’s another example here. Up we go, and then down we come again. And just going back to the 2009 low, again the bottom of the GFC had the rally up, moving averages crossed, the return moved back down. So, it’s typical price action that tends to happen when markets cross these moving averages. And I expect that this time is going to be no different. We just don’t know where the pullback towards the moving averages is going to come from. Is it going to come from here or is it going to come from higher up? That’s big unknown.

But looking at this resistance band which I’ve drawn in on the chart between 34,000 and 35,000, I think there’s every chance that we’re getting close to that point where the market is going to pull back. This resistance band, again, it’s not a perfect fit. A lot of things in technical analysis aren’t perfect, and you can see it’s overshot there and it’s overshot here, but you can see it’s been a technically active region going back to, again, April ’21. So, point to watch in the Dow. The Dow starts to pull back. We expect that’s going to flow through to the markets generally, and that could lead to that consolidation and that pause in the S&P 500.

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And now just a couple of other things to keep an eye on. This is a couple of things I’m watching. I’m watching this. This is a number of stocks above their 20-day moving average, the number of S&P 500 stocks above the 20-day moving average. As you can see, we are at elevated levels. You can see over time, these elevated levels tend to retreat back. And this is an important distinction I want to make now. Over the last 11 months, we’ve been conditioned to whenever we get to this region here into this 90% or more stocks above their 20-day moving averages, the number pulls back significantly and the market also falls significantly. That’s what you find in a bear market. The bear market rallies take the market up into this region, and then when the bear market extends lower, you see the whole market fall away.

Quite different to what you see in a bullish phase of the market. In the bullish phase of the market, when the number of stocks get up into these elevated levels, you can see during maybe 2016 or 2019 there. When it gets up into these elevated levels, it tends to lead more to a shallow sideways consolidation rather than this big deep bearish decline. So, what this suggests to me….and this is why this next consolidation the market is going to be important if this is indeed a bear market rally would then expect that this trend from previous occasions we’ve been up here will continue and we’ll get a significant fall. But if indeed we are going through a basing phase in the market and that prices are going to try and continue higher would expect that consolidation to be shallower and potentially lead to a buying opportunity.

And I’ll just quickly show you why I’m on the optimistic side that this market is going to try and push higher over the coming weeks, possibly over the next two, three months. This is the number of S&P 500 stocks above the 200-day moving average. What’s interesting here, I’ll just explain what’s happening. So, this is a number of stocks above the 200-day moving average at the bottom, S&P 500 on the top. When the number of stocks above the 200-day moving averages gets to this blue line, that’s 10% of stocks, only 10% of stocks above the 200-day moving average. When it gets below here, breaks higher, travels back up, and we get to the point where more than 50% of stocks are above their 200-day moving average, mark the points on the S&P 500. It tends to be where… The market tends to continue to move higher after that point. Here’s a little bit of a different point in January 2016. It didn’t quite get to the 10%. It got to about 13%. But nonetheless, it was getting close to this mark.

Again here in 2018 during the COVID decline. Here we are again. We’ve been down to 10%. We’re now back above 50%. So, will this pattern from the past repeat? You’ve got to give it some credence that it could. Got to assign some probability that that could happen. Maybe this isn’t just a simple bear market rally which is about to reverse. Maybe this does what a lot of people don’t think is possible. Maybe it continues to push higher. Maybe it doesn’t get to new highs. Maybe it’s part of a more complex sideways area of trading which could go on for many more months. That does take the market up back towards where it was in April or March or something during the year, and then maybe next year, we get another pullback. Who knows? That’s getting ahead of ourselves. But the point being it does look like there are reasons to believe that the market could extend higher.

So, I think the play here is to hold on to long positions, see where this momentum goes, see where it takes us. I’m looking to buy stocks on a case-by-case basis where I can see that they’ve got basing formations where they’re breaking higher. And if we get the right setup over the next few weeks, maybe if this continues to consolidate, there could be another buying opportunity for the index.

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.