Trade the Trend | Episode 18
By Jason McIntosh | Published 3 December 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?
00:21 Where is the S&P 500 going?
03:06 Where is the Dow Jones going?
07:46 Where is the Russell 2000 going?
10:48 Where is the ASX 200 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.
If you’re ready to get started, try a no obligation FREE 14-day trial of Motion Trader, and see what an algorithmic trading approach could do for you.
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 3rd December 2021. As always, this is a general commentary and doesn’t take your personal situation into account.
Alrighty, with that said, let’s jump straight to the first chart. S&P 500. Well, jeez, what a big week we’ve been having. That consolidation we’ve been talking about for, oh, look, probably the last three weeks now has really started to gather some momentum, and we’re seeing some real selling action coming into the charts.
And look, I think this is giving us some real clues as to how the markets are shaping up and where things could be heading from here.
And make sure you hang around until the end of the video because I’ll tell you, look, how I’m handling this myself, and how I’m positioning my portfolio, and how I’m looking to work through whatever the market may be coming up with at the moment.
But look, just back onto this chart. Let’s just draw in those Fibonacci levels we’ve been looking at over the last… Look, I put these up last week and it’s interesting to look at these because the market has come straight back down to the 50% retracement.
And last week we were talking, we’re up here. It’s just before this big down day, and we looked at the possibility the market coming back into this pocket in here which was the 0.38%, 2% retracement as well as close to where the 50-day moving average was at the time.
But look, we, yeah, probably got back there quicker than I was thinking was going to happen. And we’ve actually even overshot, and we’re down to this 50% level.
So let’s have a look at the…I want to jump over to a four-hourly chart just to get a little bit more detail on how this has all come about. So I’m just going to clean this up a touch. Just get rid of these bits and pieces. So look, it’s been really interesting to look at the profile of this because it’s a real tussle, real tussle going on.
You can see that the move downs are then accompanied by a or followed by a strong rally back. So again, a strong move down, then a big rally. Strong move down and a strong reaction back. And we’ve seen this the whole way down.
So to me, that says there’s a real like…people who want to buy the dip, they’re buying the dip aggressively, and they’re backing this to be just another pullback before the market goes to make new highs. But every time they do buy the dip aggressively, the selling comes in and pushes the market lower.
So look, it’s really interesting to look at, and I think there’s more to this than just another, you know, buy the dip event that we’ve seen, you know, many times over the last few months.
And I don’t know the path this is going to take, but my feeling is that we are going to see lower levels at least over the next few weeks. And I’ll show you why I think that by looking at a few more charts.
So let’s just jump back to a daily and let’s skip over to the Dow. So the Dow is really interesting to look at and I’ve been tracking the progress of the Dow over the last few weeks. A lot of focus is placed on the S&P 500 these days, but you can get some really good insights in the Dow.
So it’s a key index and it should be watched closely. And what we see here is that it’s been relatively weaker than the S&P 500.
And what’s happened here, this sell-off has erased almost all the gains from this September low. And so that’s pretty telling in itself.
So it really suggests to me that all the strength we’re seeing, not so much the strength but the resilience we’re seeing in the S&P 500 and also the NASDAQ, I think those markets are really being propped up by a few of the mega-cap tech stocks like Apple, Microsoft, and Alphabet, which is Google.
Those stocks are still trading up near their all-time highs, and they’re propping the market overall. But when you look at the market like the Dow, which isn’t so tech-heavy, you’re seeing more distribution into the market generally.
And if we look at an Equal Weight Dow chart, this is the Dow on an equal-weighted basis. It takes all the market cap effect out. So the bigger stock and the smaller stock have the same impact on the market. Looking on this basis, it’s actually broken below its September low.
So to me, that’s showing there’s some real underlying weakness coming into this market.
Look, I have to say there’s been a lot of technical damage done, look, particularly over the last week. And so now very important to make this point.
I’m not suggesting in any way that we’re heading into a bear market. So bear markets where stocks fall 20% or more, and they often last, say, 6 to 12 months, maybe even longer.
But I am looking at scenarios now where maybe we’re finally getting to the point we are going to see that 10% to 15% correction take place.
And so just to give you some ideas on how that could work out, like, let’s just measure these out. So from the top, a 10% fall is back to around here. So let’s just mark that on the chart. So that’s 10%.
Now let’s have a look at where 15% is. Fifteen percent comes in around round about there. So let’s just mark that point as well. So these aren’t targets, they’re not forecasts, they’re not projections. They’re possibilities and that’s what this is always about.
It’s always about looking for possibilities and then having the strategies in place to, look, account for those possibilities and manage risk around possibilities and also make profits from possibilities. That’s what it’s all about.
So look, I think these are potential areas where the market could come back to over the next few weeks. This isn’t something I’m expecting to play out over days. I think this is more, you know, weeks to even maybe a few months this could play itself out.
And if this were to happen, the pathway is a complete mystery. Often you see me like I’ll draw possibilities, but this is just… Look, it’s such a fluid situation.
I really don’t know how the market is going to trade over the next few days. We could have a sharp downward move. We could equally have a sharp reactive bounce which then starts to roll over and then heads lower in a few weeks’ time.
I don’t know. It could be a case that we see some sort of ABC, you know, the classic zigzag. That could be very much how this plays out, but look, we don’t know.
All I know is that I do see structural weakness in the market and, look, I’d go as far to say, I think the top’s in for the year. In the Dow, probably in the S&P 500, and look at the European stocks, the local market, I think the top for the year is in.
It’s just a matter of what happens here. Do we consolidate sideways or does this become deeper? And does it take longer? You know, we’re still waiting for more clues on how that pans out.
So another market which is giving us some indicators to what could be going on is the Russell 2000, which is the U.S. small-cap index.
So it’s been a market I’ve talked about quite a bit over the last few weeks and, you know, the big feature on this has been this large trading range which should contain the market for nine months. We got the breakout a few weeks ago in early November.
So it’s about a month ago now we got the breakout. This was a really significant event because, you know, this is a large range and when markets break out of large ranges, they often have large moves in the direction of the breakout. It didn’t happen on this occasion and it sometimes doesn’t. You know, breakouts aren’t the holy grail of trading.
They’re a great way to look for opportunities, but they don’t always work. Nothing works all the time. And in this case, we talked about this last week, the market was starting to pull back in here, which was a red flag, and now we’ve accelerated lower. And we’re now close to the bottom of this range.
So again, a lot of technical damage has been done to the Russell, and what’s interesting is that this fall we’ve had here, it’s the fourth fastest correction for the Russell, the fourth fastest correction from a 52-week high in the index’s history.
It’s taken 15 days to go from a 52-week high to a 10% or more correction. And it’s actually quicker than what we saw during the COVID crash last year.
And you might think, “Well, how could that possibly be the case? How could this be quicker than the COVID crash?” And I looked twice at it, too, but when I looked at the chart, it all made sense. This was the 52-week high in January 2020.
Markets sold off for a few weeks, had a rebound for a few weeks, and then we had the COVID crash, which was deep and nasty and, you know, caused lots of damage.
But the timer started from this point here before COVID hit, whereas this correction we’re having now, well, from the high point, it’s gone pretty much straight down.
So look, again, technical damage has been done. These moves rarely then go straight back up. It can happen, anything can happen, but I think that’s unlikely. That’s why I say, I’m starting to look at scenarios where we get maybe the 10% to 15% correction that has been on the horizon for quite a while now. Maybe it’s now upon us.
So lastly, we’ll have a look at the local market. And look, by the way, if you’re getting value from this, please hit that like button and also leave a comment even if it’s just, “I enjoyed the video.”
It tells YouTube that people are engaging with the content and that really helps me. YouTube then show other people, and more people watch it, and I keep making the videos. So a quick comment would be fantastic.
Now, okay. With that said, over to the local market. And, yeah, well, look, where are we here? So the resistance. This resistance band, which we’ve had our eye on for ages now, look, it has now repelled the market. Market couldn’t get through it, had butted its head up against this multiple times over the last month or so.
Had the swift move back down and now we’re back and we’re retesting this support band in here, which is around that 7,150, sort of, mark. We’re back down at this big support band, which held the market in September. We’re now retesting it.
So you know, the question is, you know, what’s going to happen from here? How’s the market going to respond?
So I want to go over to the four-hourly chart again because I like the four-hourly chart. It just gives a little bit more detail, and so here’s the…Yeah, so this chart captures well. So there’s that resistance band we were talking about where the market had been butting its head for quite a few weeks.
What we need to watch just in the near term is just some resistance in around here. This little pocket through here, which is around 7,300-ish, 7,330 thereabouts. To get a more positive near-term picture on this chart, I would want to see the market…Well, this is the ASX200 which is pretty similar.
The All Ordinaries has a very similar overall look on its chart, but we’d want to see this market punch up through here and get in, get up, back up towards, you know, the upper end where this resistance is. We need to see that to neutralize the immediate downside risk in this market.
Look, I think the market’s going to struggle to do that, but look, that does give us a marker to keep an eye on.
So far the balance has been…It’s been really soft. It’s just been sitting. This is your classic dead cat bounce, you know, you call it the dead cat bounce. It doesn’t bounce, it just sits there. And this market, it feels heavy, looks heavy. It had one attempt to sort of push through. That was on Tuesday, I think.
I actually put a little bit of hedging on when the market was testing this early in the week. I’m pretty sure it was Tuesday. It was right around somewhere.
It was somewhere in here and just by chance, it was around 3:30 in the afternoon, and just after I’d done it, some news came out of Europe and the market quickly fell back down. So look, this is probably a little bit of luck in the timing.
So that’s a little bit of hedging. It probably covers less than 10% of my portfolio, but look, I thought I’d put something on. I hate betting against bull markets because bull markets are resilient and they keep coming back.
But this is showing enough structural weakness for me to think, “Well, I want to put a little bit of hedging on.” And, look, as I say, I think it looks precarious.
So let’s go and look back to the daily chart, and just see what could happen. So one of the things that could happen, we could get…Like, we’ve had this fall here. We’ve had the rebound. We could get a measured move. So a measured move is where you get the same sort of fall on the second leg as you got on the first leg.
So we can actually measure that out. So if we’ve got a similar fall from the first leg, that is, of course, if this turns into a second leg, I could be wrong. Maybe this market turns and goes up. I don’t think it will, but anything can happen.
If we got an equal-sized move down, it takes us to around there and it’s interesting when you measure that out because what you find is that that is…it’s pretty close to a 10% correction. So 10% comes in there. So let’s just mark that.
There’s 10%. Let’s look where 15% is. Fifteen percent comes in somewhere around there, thereabouts. So these are possible areas this market could come back to.
And so when you look at this…and look, if we were to get a 15% correction, you got to remember, 15% corrections do happen every year or two typically within a market. And like, for instance, this one here, this is…I’m pretty sure this is a 15% correction.
Let me just measure that and, yeah, well, there you go. There’s a 15% correction just here and so, you know, we’ve been in a rising trend, 15% correction, and then the trend continued. So that’s the sort of thing which could happen here and we need to be aware of, that that’s certainly a possibility.
So what am I doing? How am I handling this? Well, my strategy is as simple as this, is to stick to my trading plan and this is the thing, you put your trading plan in place when conditions are calm, when there’s no stress, when everything is, like, mentally easy to work through.
That’s when you put your plan in place, your testings, and you lock in your plan.
What happens next is you follow your plan when everything gets a bit tricky, when uncertainty creeps in, when there’s stress in the market, when you’re not sure what to do. This is the thing you don’t need to think about what to do because you’ve got a plan which tells you what to do.
So my plan involves wide trailing stops for the stocks in my portfolio. I’ve got a…I’m not sure how many stocks are in there at the moment. There could be 50-ish thereabout stocks. Some stocks are still a long way from their trailing stops, others are getting closer.
Some have hit their trailing stops in the last week and have now exited the portfolio. So my plan, my strategy through this is to keep following my trading plan, keep following those trailing stops, giving the stocks lots of room to move.
And I think a lot of people do in these situations when things start getting, you know, when uncertainty starts heating up, they throw their plan out the window and, you know, they start to shoot from the hip and they go, “Oh, well, I don’t like this market.
There’s going to be a crash. I’m going to cash.” And more often than not there’s not a crash and it’s a moderate pullback or a correction, and then the market resumes this upward trend. But a lot of people, you know, they throw their plans out the window when things become uncertain. And in the stock market, things are often uncertain.
And look, another thing I’m doing is I’m not in the hurry to buy the dip. I’m sure there’s lots of interest in buying this dip. People have seen this pullback here and they go, “Ah, that’s what it’s going to be like again. We’re back down here. So it’s going to shoot back up like it did last time.” Maybe it will, but there’s a good chance that it won’t.
So I’m just not in a hurry to buy this dip. It doesn’t feel good to me in this market and I think there’s more downside in it. And look, if the scenario of outline doesn’t play out, well, then, you know, that’s fantastic and I’ll be ready to follow the buy signals when they invariably come as the market goes higher.
But at the moment, look, I’m just taking a cautious stance, and really, I’m very keen to see how this plays out and look for the opportunities as they become more obvious once the market stabilizes, once we start seeing a return of some upward momentum.
Well, okay. Well, I’m going to leave it there this week. It’s been very much index-focused given what’s going on, and next week, we’ll come back and look at some more commodities and maybe some more individual opportunities.
Hopefully you liked that. Hopefully that helps give some guidance over what could happen over the weekend and weeks ahead. Please give me a like if it was helpful and I look forward to coming back next week, and we’ll put all those pieces together again. Thanks for joining in.
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.