Trade the Trend | Episode 13
By Jason McIntosh | Published 29 October 2021
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 and trend following techniques to help you piece together the world’s biggest puzzle.
Where is the Stock Market Going?
00:20 Where is the S&P 500 going?
07:15 Where is the NASDAQ going?
07:56 Where is the All Ordinaries going?
13:40 Where is copper going?
Where to invest now?
Looking for ASX stocks to buy now, as well as off the radar ideas most people don’t know? Our algorithms scan the stock market daily for medium term investment trends. We then tell our members precisely when to buy shares. And most importantly, we tell them when to sell.
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Please note: Charts available from video
Welcome to this week’s edition of “Trade the Trend,” a weekly video discussing where the stock market is going. I’m Jason McIntosh. It is Friday, the 29th October 2021. As always, this is a general commentary and doesn’t take your personal situation into account.
All right. Well, with that said, let’s jump into the first chart, S&P 500. Well, look, it’s been another positive week for global equities, new all-time highs in the U.S. indices.
Look, I think it’s fair to say that the bulls are now firmly back in control, and we’ve seen also good gains around the globe in a lot of the developed world stock market. So, look, generally, it’s been a positive week.
Now, look, in the U.S. at least, the pullback is now officially over with those new all-time highs. It’s interesting. Like we just look at how big a correction this was. Well, it’s not even a correction, it’s a pullback.
It’s 6.4%, it was in the S&P 500. I was thinking at the start of this I was looking at 5% to 15%. So, we’ve very much come back in the lower band of that range, and I think that shows this is still a structurally sound market.
It’s underpinned by good buying support on pullbacks. And I think that we need to continue to give this bullish trending market the benefit of the doubt and stay with that trend.
And I think it’s really interesting to look at this because it’s really an example of why it pays to actually do that, to give the established trend the benefit of the doubt, because I think a lot of people fight the trend all the way up. And I know I’ve done this in the past.
You know, it’s something I’ve learned over the years to go with the trend rather than look for when the trend is going to end. And I remember this period through here in June last year.
Through my Motion Trader subscription service, you know, we talked to people and they’d say, “Look, we love what you do but we’re waiting for the market to crash.
We’ll come and talk to you after the next crash,” because they were convinced that things were, you know, going to roll over and the markets were going to head back down.
Of course, that’s not what they did. They kept rallying. More concerns through here.
More people saying, “Oh, well, this is it. So now we’re going to sell up. We’re going to go to cash.” And, look, again it’s like people unnecessarily getting out of the market preempting what might happen rather than giving the trend the benefit of the doubt.
And, look, we’ve seen it through here, all these little pullbacks along the way through to this one here which is no different.
And I think this is why a trend following approach with a wide trailing stop I think can be so successful over time if you have the personality and the temperament to be able to apply it properly.
And hopefully, that sort of approach has been a big help, and you see off this latest bout of volatility. I just want to give you a quick example. This is a stock from my Motion Trader subscription service.
So, I sent this out to members in…when was it? It was January early this year. It’s a funds management business, Australian Ethical Investment. And so, what we have here, the moving averages have just turned higher.
So, I’m using 50 and 100-day moving averages as the underlying trend indicator. And then I’m using a breakout strategy. So, they’re just broken out to a new high after a period of consolidation.
So, that gave the entry signal. And then we apply a trailing stop loss below it and giving a nice lot of room to move. Trade got off to a good start. Had a pullback. Nothing unusual there.
Markets always pull back. But the secret to staying in the trend I find is the width of that trailing stops. A lot of people like to have their trailing stops nice and close. That sort of hugs the share price on the way up.
So, even a move like this, this little red bar there, that would be enough to stop a lot of people out.
That didn’t get them, well, this move here almost certainly would, and you go, “Well, that’s a nice profit.” That’s probably 20% or something but it’s just such a small part of what’s possible if you’re prepared to give your stops more room to move.
So, look, this trend has continued on. This is the latest bout of volatility that we’ve had in the market. So, on this scale, this doesn’t look too bad. In hindsight you go, “Oh, yeah. I could have seen that off.” That’s an 18% down move and it’s happened quite quickly.
That’s going to scare a lot of people out of the market and they’re going to be closing those positions out. And this one here is 14% again. A lot of people, you know, uncomfortable, particularly if they don’t have a strategy which is, you know, a nice calculated strategy which tells them when to get out.
If you don’t have that, you just don’t know. It’s hard. You don’t know what’s going to happen next so you bail out through fear and uncertainty. And so, look, this is just the advantage of those wide trailing stops.
So, you know, my subscribers have been able to stay in there and rough about…I think it’s up about 150% and still going. So, look, just a little sidetrack on staying with trends, not being shaken out by market pullbacks, and giving your stocks a nice amount of room to move.
So, let’s jump back to where we were on the S&P. And, look, so the question is where to from here? So, we’ll just expand that out. This has been quite a good run. It’s been an unchecked run.
There hasn’t been…I think there’s only one down day. Been one down day from, you know, the start of the move back here in mid-October. So, look, it’s not going to keep doing that.
I think there’s every chance we’re going to see a bit of a pullback now. Maybe it chugs on a little bit further but my feeling would be…Now, look, just to give us an idea of what happens at new highs, what we often see at a new high is a pause.
So, look, let’s just go through a few. So, back here, we can see the market made a new high, and then it had a pause. Where are we? Over here. Market made a new high then it had a pause.
Here, we had a down move up to a new high then again a pause for like a couple of weeks. You see this often, you know, down here in a down move, rally to a new high then a couple of weeks’ consolidation.
It’s a very stock standard thing that markets do. Make new highs, pause to breath then continue on. If that sort of pattern were to appear here, we could see a move down over the next week, attempt to rally back, another bit of a pullback, and then we might see the market punch up to new highs a few weeks later.
That’s not a prediction. It’s a possibility and it’d be a very unsurprising possibility at that. But at this stage, I’m not expecting pullbacks to turn into something larger. There’s no evidence about it at this point, so I’d expect the pullbacks to be temporary of nature.
All right. So let’s quickly jump to the NASDAQ. Last week, I drew this line down through there, and the point of doing that was last week the NASDAQ was here. It was sitting below its highs. S&P 500 down.
They’d already made new highs. S&P hadn’t. So, I drew this line and said, “Look, we just want to keep an eye out and make sure we don’t have divergence form.” So, divergence would have been if the NASDAQ didn’t make a new high and started to pull back.
You don’t want to see that. You don’t want to see diversions in markets. It’s a sign of weakness. Fortunately, that hasn’t happened so, look, we can take that scenario off the table. NASDAQ is at a new high which is a good thing for the overall structure of these markets.
Let’s jump to the Aussie market. Okay. So, look, not as strong as U.S. It’s really been struggling to get through this resistance band here. It’s a bit of a tricky resistance band in that it’s not exactly clear where to place the upper boundary.
Is the upper boundary here? Is it here? Is it here? Look, the best thing we can do here I think is to recognize that there is congestion around these points, all through here and here.
So, to signify that the market is taking the next leg high, we need to see a decisive break above this level. Friday’s moving in the ASX looks…been weak and this would suggest that the market is probably going to drift back low.
It may well even test, come back and retest these lows that were so important which was such a battleground about, you know, earlier at the start of this month. We could find that the market sort of like, you know, makes its way down here.
Before then, maybe then it rebounds and heads higher. That’s still my preferred case. My preferred case is that we’re going to see this market break higher at some point. It doesn’t seem like it’s ready at the moment.
Looks like it wants to come back and consolidate for a little bit longer. But at this point, I don’t see anything in this big broad trend to suggest that this is a top in place, you know. You never know. We could even see, like, a bullish wedge form.
Like, this is complete speculation and guesswork but just to show, just to look at bullish possibilities. So, a lot of people would be looking at this and be thinking bearish possibilities.
So, they will be looking for, “Look, are we going to do another one of these?” I don’t see that set up in the charts at the moment. It could become set up like that but it’s not at the moment.
At the moment, this is my preferred case and we’re looking for signs that we’re doing this and using those wide trailing stops to stay with this broad trend. I think that’s a play.
I think that’s a play for now. We’ll see how this comes together. And, look, I think the reason the Aussie market is dragging the chain is because those big iron ore miners BHP, Rio, and Fortescue, like together they make up about 10% of the Aussie market.
So, just briefly looking at BHP to show you what I mean. So, it’s been a pretty diabolical couple of months, and BHP has just broken down out of this little flagging formation.
And I think there’s every sign that next week it’s going to continue onto a new low. Look, there’s no sign of bases at the moment. It’s probably going to…Fortescue and Rio are probably going to continue to be like a lead weight around the local market.
So, while the U.S. market has got some of those tech giants charging, which are their big mega-cap stocks which really drive the big indices over there, some of the big local plays are those iron ore-focused companies which are doing the opposite.
They’re being a weight, a heavy lead weight on the market. So, that’s part of the reason I think we got that divergence between…all that difference at least between the U.S. and the Aussie markets.
Look, there’ll be people trying to, you know, pick the low down through here but look, I wouldn’t be trying to pick the low in iron ore miners at this stage because you never know how low a trend is going to go or how long it’s going to last.
Anyone trying to pick low points has been burnt so far. Look, this will be an interesting one to come back on on another day, but basically, I’ll be looking for the markets to make a final low, have a burst higher, have a pullback, not make a new low, and then start to make a new high.
That’s when iron ore becomes interesting. We’re not there yet. There’s no hurry to get excited about this but it’s just, look, a factor which is impacting the local market. Interesting indicy [SP] to look at is this one here, the S&P, ASX 200, ASX 200 equal-weighted index.
So, this is interesting because it means that, like, the biggest stock and the smallest stock in the ASX 200 equal-weighted are weighted the same. It’s not market-cap driven, and this is looking stronger than the old ordinaries or the ASX 200 in that this one almost made a new high this week.
So, it really does show the impact those big miners are making. Again, though, it does look like this market wants to pull back. We’ve got a strong support region coming in around here, roughly coincides with what we saw on all ordinaries earlier.
And again, I’d be looking for this to probably now make its way down to this support before, you know, retesting and then maybe pushing higher, again looking for this to be a consolidation before new highs.
That’s the base case but, of course, as always, we need to see how this unfolds. I think pullbacks are corrective and consolidative at the moment, but let’s just…you know. We’ll see how it unfolds. No red lights flashing at this point in time. Okay.
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So, please do those things, like and subscribe. That’d be a fantastic help. Okay. So, I’m going to finish up with the potential opportunity which has been setting up in the copper market. It’s going to jump to copper first.
So, look, last week you might remember I drew this bullish wedge formation which copper had just broken up and out from. It’s really nice-looking pattern with a nice clear-cut break. I’ve had a return move.
Now, the question is, is this a start of the next big leg higher in copper? So, last week, just a quick recap what I said last week. We had this big rally here and now we’ve had this consolidation.
My concern which you might remember is that I’m just not convinced this is enough consolidation to correct this whole move up.
I think it requires more time. I think we’re going to need to see copper move within…Yeah, it could be something like that takes us out to March next year, something into the first quarter of next year from a bigger base, and from that bigger base then we can get a leg higher.
That’s just speculation. I don’t know that’s going to happen, of course. It’s just looking, again, for possibilities. However, another possibility is this is all over and these green metals are going to run hot again and they’re going to charge off to new highs and keep going.
If that’s the case and you want to position yourself from there, well, this is one of those asymmetric opportunities, and by asymmetric I mean it’s one of those opportunities where you can have relatively low risk for a high potential return.
Now, I’m not playing this because of this scenario which I just outlined but, look, I could be wrong on this. Maybe this is the start of something new. So, look, let’s just go through a setup which I’m quite sure a number of traders would be looking at and trying to play.
So, the way this could be done would be, well, firstly, let’s look at a Fibonacci retracement of that last up leg. And, look, it comes back to the lower band of the Fibonacci and it’s right on support from the top of that wedge. So, we got some clear-cut levels to work with.
So, if we wanted to play the long side, let’s just get rid of our fibs there. We wanted to play the long side at current levels and, you know, buy the dip. A lot of people like to buy the dip. I prefer to buy strength. Buying the strength.
There’s nothing wrong with buying the dip if you got good risk management. You could have a stop loss somewhere around there. So, that’s below the highs from Thursday in the U.S. and below the top of this wedge formation.
So, just roughly measuring that out from current levels it’s only about 3% down to there. Not very far at all.
So that’s a, you know, relatively tight stop. And then we go, “Look, where could this rally to? What could happen?” And if we do get…If this is a return move before a further rally, you’d expect to see, you know, a run higher pretty soon, really in the next few days, probably then a pullback and then another punch up to a new high.
So, that’s a sort of price action you could look for. You can do a measured move as well. So, we can take from the low point of the last advance to the high then back to the recent low point.
And we get a move up to somewhere around here. Pretty much where I’ve drawn to. So, let’s measure that from the current price up to the top there. It’s around 16% and, look, you potentially got, you know, 3% to 4% downside.
What’s that? That’s about…you know. So, that’s roughly a risk-reward ratio, well, a reward to risk ratio of four points reward, one point risk. So, look, that’s pretty good. That’s a pretty good setup when you get those four to one sort of payoffs. That’s what I mean by being asymmetric.
On the risk side, we got a one, on the profit side, we got a potential four. Very, very good sort of ratios to go into a trade with. And, of course, these things can run a lot further as well. So, look, interesting play.
If I were doing this I’d probably be more interested in this here, this Global X Copper Miners ETF listed in the U.S. Again, we got a nice little wedge formation that’s broken out of. Different wedge on the actual physical copper or the copper futures chart.
But again, it’s one of those situations where, you know, you can have your stop loss just below the high from Thursday in the U.S. below the top of the wedge. Again, you got about, you know, that 4%, 5% move. You’ve got the… Let’s just project up.
You got, you know, potential run-up to there. So, again, that comes to…you know. That’s around that 15% sort of mark I reckon. You know, 16% up to there. So, again, look, you’re looking at four to one, maybe five to one, you know.
If we see a move like this and it could go a lot higher, you know, making new highs that’s the potential of this sort of move. But, again, I’m not playing it myself. I don’t discount it by any stretch, but yeah, look, I’ve got a lot of stuff going on in the local market.
You can’t trade everything. You got to pick and choose. You got to be selective. You got to go with what works best for you and your strategies. Yeah. Look, I like it but not enough to be readjusting capital and moving into it.
But, look, everyone has got their own call on these things. So, look, again, if you’ve liked this, please hit that like button. Very important. And let’s call that a wrap for this week.
Thanks for joining me. Let’s come back next week and have another crack at working at where the markets might go next. Hope you got something out of it. Thanks for joining me. See you next week.
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.