Why You Shouldn’t Buy the ASX 200, Yet | Episode 51

By Jason McIntosh | Published 15 July 2022

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 of stocks and trend following techniques to help you piece together the world’s biggest puzzle.

Where is the Stock Market Going?

00:00 Intro

00:32 Why the ASX200 remains is vulnerable (and what you should do)

03:08 ASX Small Ordinaries getting interesting (and the ETF to play it)

07:16 Be wary of high conviction calls (this is a disaster)

Transcript (abridged)

Please note: Charts available from video

The ASX 200 has continued to trade in a tight range over the last week. It remains capped below this big resistance band, which is between 6,750 and 6,900. It’s also worth noting where the 50 and 100-day moving averages are. While the ASX 200 remains below this resistance band and below the moving averages, I think the underlying position remains vulnerable.

If you’ve seen my analysis of the S&P 500, you’ll know that I talked about the possibility of a bear market rally. And if that were to happen, then it would be natural for the ASX 200 to rally as well. But I think given the weak technical picture, I just don’t want to preempt a rally, and I don’t want to try picking the low. I think we need to continue playing defense until the market tells us otherwise. I’d rather be late to a new bull market than try picking the low and then having the market run over the top of me.

And I’ve got to tell you that over time, I’ve seen that happen to so many people during these bearish phases. And what happens is you get people continually trying to pick the low or buy the dip, and the market just keeps beating them up. If the U.S. market were to rally, there’s nothing saying the ASX 200 couldn’t do something edge higher and test back into this resistance band. But from there, it could then start to roll over again.

While the ASX 200 remains capped below resistance, it remains, in my view, a vulnerable market. I don’t think there’s much to get bullish about right here now. It just doesn’t seem to be in a strong position.

Now, I want to go over and have a look at the ASX Small Ordinaries because that’s been interesting this week. I’m mindful that the Small Ordinaries is currently getting stretched below its 100-day moving average. And there’s a possibility that from where we are now, that it does keep edging higher and then starts to get some momentum.

But I think the pattern to watch, is this flagging pattern (see video) which has been developing over the last three weeks, similar to what we saw in May. These patterns often occur during market declines when the market pauses to consolidate, and then breaks down again. The risk is that this pattern does break to the downside, and over maybe the next week or so we the Small Ordinaries break to a new low. That’s a concern I have with the local market.

The local small caps have been hit really hard during this correction. From their highs in November last year, they were down something like 27% at the lows. That’s a big fall. And I think there’s probably a lot of fear and a lack of liquidity in these small caps generally. And I know that from exiting stocks in my own portfolio that liquidity has been an issue. It’s been difficult to get some of those stocks away. So, for a fund manager trying to liquidate these smaller stocks, it’s one of the things which could be driving these smaller caps lower.

I think at some point, this is going to present a really good opportunity to get back in. And one of the ways which I’ve been looking at to potentially playing that is through a Small Ordinaries ETF. iShares have one. The stock code is ISO. I don’t think we’re there yet because there is that potential for this market to make a new low. But it’s a market which I’m closely watching for a potential opportunity, and it’s one I’ll continue to look at in this weekly video.

The ETF approach could be a way of getting back in because it probably lowers the risk compared to buying individual stocks. This could be a good option, at least until stocks start to stabilise and we start to see the moving averages turn and more momentum, in general, coming back into the sector. But let’s just keep an eye on this one.

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.