Don’t Buy ASX 200 (Buy These Stocks Instead) | Episode 80

By Jason McIntosh | Published 28 October 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 ASX shares, the ASX200, 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 Going?

00:00 Intro

00:34 ASX 200 in the neutral zone (what you should to do)

04:20 Stock selection is key right now. Look for set-ups like this.

07:17 Get on the right side of a trend with these simple steps

09:53 This is what a typical retail portfolio looks like (warning: it’s not pretty)

Transcript

Please note: Charts available from video

So, we’ve got the ASX 200 up on the screen. And it’s got to be said, it’s been a mildly positive week, but I think, overall, the local market remains pretty much in a neutral zone.

On the downside, we’ve got this double-bottom support coming in at around 6400. On the top side, the ASX 200 is currently testing a couple of resistance points. So, firstly, we’ve got resistance from the 50 and the 100-day moving averages. So, when a market is rising, the moving averages tend to provide support, but then when price is below the moving averages, the moving averages often provide resistance to the market. And that’s what we’re currently seeing.

We can also add some Fibonacci retracements on. So, if we use this August high point and we measure down to the low, you can see the market has rebounded pretty much up to the top of the Fibonacci retracement zone. So, we do have this double resistance zone causing the market some trouble in trying to push higher. And what we can also do, which I think is interesting to look at is just going over to an hourly chart and just looking at the structure of the price action over the last week.

And what you see, it’s becoming quite choppy and quite overlapping as it moves upwards. So, it’s not impulsive. When I say impulsive, it’s like just looking back at some previous price action. This is an impulsive move through here. You can see the moves are strong, the pullbacks are relatively shallow, and the market moves its way up nicely. That’s not what we’re getting just through the last week. It’s becoming quite overlapped.

So, it’s a sign of a market that’s struggling to move higher and looks like it needs to do….maybe needs to pause some more. Just going back to our daily chart, another point to note is the ASX 200, it’s only around 12% below its all-time highs, which is quite a different situation to what we see in the U.S. and Europe. So, looking at the U.S., the S&P 500 is 26% below its highs.

So, when we look at the potential for a rebound or for possibly a stronger bear market rally, if that’s what’s occurring at the moment, we just don’t know. But the upside potential seems to be less appealing in the local market. I think the environment that we’re currently in, I think stock selection is just so important.

And, of course, stock selection always matters, but especially so when the index is not trending, when the index is just moving sideways. Because there are stocks within the ASX that are currently presenting opportunities which are currently trending upwards and have been trending upwards for many months. But you look at an index IP ASX 200 and you just wouldn’t know that because, just by its nature, this is a capitalization-weighted index, so it relies mostly on what the biggest stocks are doing. And if they’re not trending, well, neither is the ASX 200.

And I want to show you what I mean with a couple of examples of individual stocks where they do show the potential for opportunity. So, one such stock is Ansell. So, Ansell is a large stock market cap of about $3.5 billion. And I think this is a good example of why stock selection is so important because, for much of this year, Ansell has been a stock to avoid. You can see the moving averages are trending lower and the prices, for the most part, remain below those moving averages.

But what we’ve seen over the last few months, well, since June really, what we’ve seen, we’ve seen an initial rally, a sideways consolidation. All of that has given the moving averages a chance to start to stabilize, turn higher, and now they’ve just begun to cross, so the 50-day moving average is moving above the 100-day moving average, which is the first sign of a potentially positive trend. We’ve also got the price recently breaking to an eight-month high. And so these are positive developments.

So, these are the things I look for and these are the things my Motion Trader service picks up with its algorithmic scans. This is what we’re doing. We’re scanning the market for stocks that have characteristics like this, and others as well, which would show upward momentum. And it’s also interesting when you overlay, just overlaying an ASX 200 chart with this. So, in the yellow, we’ve got the ASX 200. What I think is interesting here is that you can see some price divergence in that.

So, look at the ASX 200. It came back to that double-bottom retest. And you look at what Ansell did…just need to move this up a little bit…and you look at what Ansell did, and instead, it didn’t come down. When the ASX 200 made a new low, Ansell was relatively quite a bit stronger. So, it’s interesting to see these characteristics developing in the price chart. And this is an example of where we can use momentum to identify potential opportunities.

And what I’m trying to do when I’m analyzing stocks, analyzing the market, it’s I want to build a portfolio with a strong stock bias. So, I define Ansell as currently a stock with a strong stock bias. It doesn’t guarantee they’re going to stay a strong stock, but it’s a good starting position. You want to start from a position of strength, buying a strong stock bias, not one which is in a tailspin. That’s usually not how you get ahead.

I’ll give you another example. So, this is a smaller stock. It’s a stock called Praemium Limited, ticker code PPS. And this is involved in financial service technology. And interesting stock. Again, it was one to avoid for much of this year once the share price broke down and those moving averages turned, the price was below. There’s no buying the dip during this period because it’s a treacherous time to buy the dip because the price is trending lower.

What’s interesting with this one is that what we can see has developed is we’ve got this rounding bottoming formation where the price loses its momentum. It starts to turn higher, and then breaks to the top side. And just like Ansell, the move higher has been gradual. It’s not a V-shape bottom like we saw during the COVID crash period. This one’s taking a little bit more time to trace out. It’s a classic bottoming formation really where you get the initial move higher, the sideways consolidation, the moving averages cross, and the price breaks out.

So, this is a situation that I want to be looking out for, and which I am looking out for through the Motion Trader service. And there’s no way, of course, to know which one of these stocks will continue to rise. A stock can break higher, and then turn lower. But this is where probability tends to favor getting a stock that does well because you’re trading with the momentum, you’re trading with the trend.

And this is what I mean by being stock-specific. It’s about looking for stocks that are trading above their moving averages and have positive momentum. And I think if you can do that, I think you can really narrow down the field of opportunities considerably, and also avoid a lot of the stocks which are currently causing the ASX 200 to meander sideways.

Now, I want to show you what many retail portfolios currently look like. But first of all, if you’re getting some value from this, please hit that like button. Please leave a short comment, just, “Hey, Jason, thanks for the video.” It just tells YouTube that people are watching, people are engaging, then YouTube shows more people because it takes ages to put these videos together. And if you can show that you’re watching, it helps me immensely, so please do that.

Now, this turned up on my Twitter feed through the week. This is really interesting. It’s a “Financial Times” article. They talk about retail portfolio’s down 44% year to date. And we just go into the article, and it was all done according to data from JPMorgan Chase. So, they’ve gone through their data and they’ve been able to compile what they believe looks like a typical retail portfolio.

Now, the really interesting part is this graph. So, this is the graph they’ve compiled, estimated performance of retail traders. So, this is from the beginning of the year. This is where they say down 44% year to date. But if you go back to the peak, the peak was midway through last year. So, that, to me, looks like a decline of something in the order of approaching 60%, which is quite extraordinary.

And you think, “What causes a portfolio to potentially be down 60%?” And from my experience, it’s things like people taking big bets, big positions in a handful of stocks, people selling their winners to pay for their losers. Classic mistake. You’re losing money in one stock, so you sell your best stock and cap its advance, holding onto losers instead of selling them. Instead of using some risk management and exiting your losing stocks, you hold them.

And then, of course, one of the biggest disaster areas of all, it’s averaging down into a stock that’s trending lower. It’s one of the quickest ways to destroy your portfolio. So, I think this would be a reality for a lot of people. And the sad thing is it’s such an avoidable situation to be in. This is such a completely avoidable situation, but I think you’ve got to have a process.

You’ve got to have a process for when to buy, you’ve got to have a process for when to sell, and you’ve got to have some understanding of risk management principles. It’s not rocket science, but even though it’s not rocket science, many people, they never get close, and this is their reality. It’s disappointing, and it’s avoidable. So, hopefully, your portfolio is not looking like that. And if it is and you need a hand, don’t worry, lots of people need a hand with these things.

Come over to my website, motiontrader.com.au. This is what I do. I help people understand what…those examples we were looking at earlier. That’s how you can potentially build a portfolio with a strong stock bias and not be looking like that article from the “Financial Times.” I hope you found that interesting. 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 details analysis and charts

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