Trade the Trend | Episode 3 

By Jason McIntosh | Published 20 August 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?

In this week’s edition: 

00:00 Intro

00:45 Where is the Dow going?

01:51 Where is the S&P 500 going?

03:22 Where is the Russell 2000 going?

06:20 Where is the All Ordinaries going?

08:58 Where is iron ore going?

11:55 Where is copper going?

13:06 Is Vulcan Energy (ASX:VUL) worth buying?

15:34 Is Liontown Resources (ASX:LTR) worth buying?

16:28 Is Novonix (ASX:NVX) worth buying?

18:14 Is Hazer Group (ASX:HZR) worth buying?

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Transcript

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 20th of August, 2021. As always, this is a general commentary and doesn’t take your personal situation into account.

Episode 3 about to get underway. I’m going to be bringing these to you each week. Now, I cover the latest developments in the market, focusing on some of the opportunities and the trends that I’m seeing.

And as always, if you like what you’re seeing, please hit the like button. Let me know you’re getting some useful information.

Also, look, leave me a comment. Let me know which markets or stocks you’re interested in, and I might cover them in a future episode.

And of course, hit that subscribe button in the bottom right-hand corner of your screen and hit the bell icon. That way, you’ll get a notification whenever I send out one of these new “Trade the Trend” videos.

Okay. Now, let’s jump into it with the first chart. So I thought we’d start with the Dow Jones today.

So really interesting week. We’ve had a failed break. So last week, we were talking about the market breaking above this resistance band in here.

So let’s just draw that on the chart. So we’re talking about this breakout.

We’re talking about how the market had broken high from there and looking at potentially, like, you know, fairly higher levels, like up through here, over the next few weeks, maybe a couple of months.

We’ve now come back below here, broken back below, so we call that a failed breakout. And we’ve also made a lower low.

So we’ve got this low point here, and last night’s low has gone below it.

So we’ve broken that series of higher lows. So look, it’s not the end of the world with this market yet, but it’s a sign that we are losing some momentum, and, look, it’s not really what we want to be seeing.

So, look, we’re going to have to keep an eye on this and see where and how this plays out. Let’s jump over to the S&P 500 and see if we can get some more clues from there.

And look, I want to say in this, there’s definitely nothing scary going on. I want to throw on the moving averages. We can see the market is just coming down there.

We’re just above this 50-day moving average. And now, this had a really good history over the last year of sending the market higher. You know, we dipped below there but only for a couple of days. It’s really been a real big bastion of support for this market.

So look, I expect the buy-the-dip traders to come in probably over the next couple of nights.

And look, you know, we could end up seeing some updates maybe like… Let’s just draw a couple of things on the chart.

I could expand it out a touch. Look, I want to be… If we do get a rally, I want to watch how this rally…watch the structure of it.

If we get something which is, you know, quite muted like that, just some pretty soft up days, the risk and the thing that I think we need to keep in mind is that a couple of soft up days could potentially lead to something like that where we do see something more serious develop.

Again, this isn’t the base case at the moment. This is a possibility. It’s just a possibility, but it’s a possibility you need to be aware of. So that’s why it’s so important to watch what happens over these next few days.

So let’s jump to the Russell 2000. So this is the one which has been really giving me the greatest concern, and we spoke about this last week. We were talking about this rising wedge formation which had been taking shape.

And the thing with wedges is the market often falls out of the bottom of the wedge. That’s exactly what’s happened. So, like, I referred to this last week as the canary in the coal mine.

It was the one which was really off-footed from the other indexes which were breaking higher or at least testing those 52-week highs. Russell 2000, if you don’t know, contains the U.S. small-cap.

So a small-cap in the U.S. is still a pretty big company. There’s 2,000 of them. It gives you a better feel for, you know, the rank and file of the U.S. equity markets. 

And look, that’s a concern for me. And these moving averages also look like they could be rolling over. So if we just bring a little bit more data on the screen, the other thing we’re watching on this is this big consolidation band.

So what we’d like to see…we’ve had this big run-up, we’ve had the consolidation, we’ve been hoping that this would fall into line with the other indexes and break upwards. The risk at the moment is that we could break to the downside.

So again, it’s not the base case, but it’s a serious alternate. So let’s just measure the distance of that, you know, the width of that range, and let’s just project it down. 

So if that were to break, it’s possible, you know, you get a downside count down to around here, which, look, that would be a pretty ordinary sort of break if we got that.

So you just measure that and that is…well, look, you know, it’s about a 10% width of the range. Project that down to here and, you know, you’re potentially seeing the market come back 23% from these peaks.

Another 10% or probably another 13% here. So, look, that’d be pretty ugly and it’s… You wouldn’t expect that this market would be moving to its own beat.

You’d have to expect that the other markets would…that it’ll generally fall into line. So we want to watch this. We need to see what happens. We need to see what these other markets do around their support zones and just be wary of what could potentially happen.

Just looking at, you know, some Fibonacci levels on this move. So we measured and that’s probably pretty much where that last leg-up started from. And look, you know, this possible count does come to the lower end of the Fibonacci ranges.

So, yeah, it is in play. It is within the realms of possibility. Let’s jump to the local market. So look, interesting week in the All Ords. We’ve spoken, for the last couple of weeks, about this trend channel that the market’s been in for…going back to around February.

So let’s just draw that in on the chart. Let me just extend that up to there. I’m just going to play around with it for a moment, just get the right fit. Yeah, that’s about right, and then on the upside.

So look, interesting. With the upper bound of this channel, we’ve tested it and we’ve come straight back down off it. Now, the thing that we need to keep an eye on now is this support band through here.

So this was where the market broke up from. What’s that about? About three or so weeks ago we got the breakout of that, and now we’re coming back down. It looks like we’re going to retest it.

I’ve also got the 50-day moving average coming in beneath it. Look, this is something to watch. We want to see how the market responds off these levels. We want to see… Hopefully, we’re going to get a bounce and then we want to see what the quality of that bounce is.

If it’s, you know, a soft pretty unenthusiastic bounce, the risk is that we do come back down at the bottom of this trend channel. And if we break below the trend channel, well, then that opens up the window that we do get to see this larger pullback which has been speculated about for months now.

People have been waiting for this big pullback. Again, I don’t think it can be our base case. The trend is still up and we’ve got to give the trend the benefit of the doubt.

But it’s now time, I think. Really, look, as I’ve been saying over the last few weeks, it’s a time for being cautious. So if you’ve got stocks in your portfolio which aren’t performing, you might, you know, you start to consider, look, are they worth holding on to?

And if you look at your trailing stops, you want to know where your exit points are. If you’re using leverage, you think, “Well, look, do I want to have leverage at this part of the cycle?”

And it’s just putting in together a bit of a battle plan for, you know, what could happen. Corrections are part of the market, they’re normal, they occur. We haven’t had a 5% correction for a while.

Ten percent corrections happen. They happen every year or so. So look, it’s nothing dire necessarily and I don’t think there’s anything dire happening, but there’s things going on that we need to keep in mind.

So with the market’s had a look at, let’s jump over and quickly look at a couple of commodities. Iron also had a bit of a…been in the news over the last week.

Let’s just, like, look at this. It’s been pretty fast and furious on the downside. But let’s get a little bit of perspective because, you know, I love looking at these longer-term charts just to get some perspective.

Iron ore, it’s prone to these sharp pullbacks. So let’s look at a few of them. Let’s look at this one here using the Fibonaccis, the Fib levels. So this one here, this move came back to 61.8% and, you know, that held there.

So that was, you know, we had this big move, then you got this big pullback. And we’ve got another one going on here. So probably use there as our start point.

This one came back. It was a deeper correction. It came back below, but, you know, again, we’re coming back. We’re having these deep pullbacks.

So you look at what could happen here and we go up there. And look, we’re already well into that range. So price-wise, there may not be a whole lot more downside from here.

Time-wise though, I think there’s been quite a bit of technical damage done and you’ve got to expect that there’s got to be time. There’s going to be time required to work this through.

So you look at this move here. That was March 2017 through to…oh, look, January 19. So you’ve almost got a two-year consolidation of just going back and forth, not being very exciting.

Here it was… What’s that around? June or July 2019. Got going again around May 2020. So that’s around what? Around 10 months of correction.

Who knows? Who knows what’s going to happen here?

But this is a big move. It needs to be corrected. The correction is clearly underway. I don’t think we’re going back to new all-time highs anytime soon. This is just going to take time to play out.

In terms of what to do with any iron-ore-related stocks, you might have, well, I think this move is probably about as far as it’s going to go for the moment. I don’t think there’s a whole lot more downside in it.

So now you look at, you know, a possible retracement. So if we say the move started from there, if we look for a rebound, we could see a rebound somewhere up around this region here over the next…who knows?

It could take a few weeks or a couple of months. We could find our way back into there, then we look at the structure of the rally, look at the stocks individually, and go, “Well, look, what’s best?

Is it best to hold these stocks and just continue to ride it through, or does it look like there’s going to be lower levels, there’s going to be a retest of the low?” Too early to say.

We just got to wait and see at the moment. So let’s just keep an eye on how iron ore develops over the next few weeks. Just quickly look at copper. Look, we’ve had this failed rally, trying to buy the dip.

Traders came in, tried to take it back up. It’s fallen straight back down, made a new low. Again, look, there’s technical damage done. It’s going to take time. We spoke about oil last week.

It was doing something similar and it’s followed through to the downside again this week. A lot of these industrial-type commodities are doing something similar.

So I think the, you know, we’ve had these big sweeping moves and now they need to be consolidated and corrected.

And I think that’s probably the sort of phase we’re going into now. I don’t think we’re going into big bear markers by any stage. I think something like copper has terrific potential over the next few years, but it’s not going to happen in a straight line, it never does.

You know, you can’t expect this is going to continue on for the next five years like that. It needs a shakeout, and we’re having that shake out now. So you know, stay tuned to copper.

I think there’ll be a terrific buying opportunity at some point, but it’s going to take a while to get there. So in last week’s comments, I was having a look, and a few people were asking about renewable, renewable energy stocks.

One of the names that came up was a company called Vulcan, Vulcan Energy. So it’s involved in the lithium space. So look, interesting stock. It’s like a lot of the lithium players.

And I’ve actually been getting quite a few entry signals for lithium stocks over pretty much the last year, and this is one of the ones I had an entry in. Look, it’s a while back now.

It was back in…this one was back in June, so probably it wasn’t too long ago. I got an entry for this one just around here as the price started to break above these previous highs and got the entry, got a bit of a consolidation because you often get that.

You know, an entry signal doesn’t mean a stock’s going to, you know, going to do this. Often it’s a sign and it’s telling you where the momentum in the market is. But then momentum still needs time to chop and work its way higher.

You know, you get the steps higher, so you know, we’ve got a step up there and a step down, step up, step down. And I like seeing these little patterns along the way, like, there’s a nice little consolidation.

And these are all very tradable patterns. You keep an eye out for these consolidations and then you get the breakout from them, and you can get good moves.

And this was a great move up here and… But look, I think this has probably come about as far as it’s going to go just for the time being. I think it needs to do some work.

I’m just going to put the…throw the moving averages on up here, and let’s just do a measurement from the top of this move down to the moving average. So look at that.

It’s close to 40% above its moving average, you know, which is a long way. And you look at the… We had, you know, this period here.

This was well above the moving average too, but whenever something gets too stretched from this moving average, gravity tends to pull it back down and that’s I think what we’re seeing now.

So I like a stock like Vulcan Resources. I think the trend is still up. If I owned it, I’d want to be, you know, I’d want to hold in there. At this point in time, I’d have a trailing stop. My trailing stops are quite wide, I’d be back here somewhere.

So I risk giving quite a bit back, but I’m trying to stay on really big medium-term trends over one to two years. And, you know, a stock like this, if you can stay in the correction, it does have the potential to go a whole lot higher.

But, yeah, again, now we need to see how this correction plays out. Another stock that came up was one called Liontown Resources, again, in the lithium space. Again, you know, we’ve got that big trend there.

Looks like it could go a lot further over time. This whole big decoalonization theme is, you know, I think is a really big story. But look, I think the fun is probably over for now. There’s probably some consolidation.

Again, if I owned it, I’d be holding it. Who knows? Like, we could get a consolidation like that which just chops around and does a bit of this for a while. And then, you know, you could see something like that.

That’s possible, but, yeah, that’s just guesswork, of course. But, you know, that’s how it could play out. It could be deeper. It could like, zigzag, down, up and then, come back down here. So you’ve got to give these things a lot of room to move, but lots of potential still. Still on an uptrend.

Just quickly, I’ll just show you a couple which I’ve been watching recently. I saw this stock that came up in my scans this week. I hadn’t noticed it for a little bit. No, that’s not the one.

This is the one. It’s involved in the lithium space. What it is, they do synthetic graphite endodes for…it’s part of the lithium-ion battery and it’s… Look, it’s a really interesting stock. First came up in my scans.

I’m just going to get the moving average off at the moment. First came up in my scans just down here, when it was breaking higher. And really interesting because, you know, I had all these classic signs of an interesting stock.

So we had this rounding base there and then we had a resistance band just in there. And I got a buy signal…actually a touch higher than that…I got a buy signal for this just after the breakout, just after the breakout.

It’s just about here. So that was a nice little entry point of this stock there. Again, you’ve got a little consolidation after the entry just in here.

So you always keep an eye out for these congestions because they, you know, they lead to nice opportunities. So if you missed that breakout, you then had another entry breakout here.

This is a stock. I think it’s really interesting over the medium term. Again, you know, the rubber band looks pretty stretched here and gravity is just pulling it back, so it’s probably got some consolidation to do.

But look, it’s one of those stocks I’d really be looking for for an entry point now. I want to see how this consolidation plays out and where I might be able to get in.

Another stock I’m keeping an eye on is called Hazer Group. This is an interesting one. It’s involved with low-emission hydrogen and graphite production. So I had a signal on this last year.

It was back here, just as it was breaking out of this… Just here. Just as it was breaking out of this sideways consolidation. Got the breakout, got the entry, and I got an exit for it somewhere around there.

So you know, the way I play these things is just give them room to move, stay with the trend as long as possible. Such a volatile stock. I had to give it, like, a lot of room to move.

The hope is that, you know, it consolidates like here and then lifts off again. But it kept coming back. So you’ve got to call stops on these things somewhere. So that was my exit, but I’m keeping a close eye on it.

Now, it looks really interesting in that, like, this is potentially a big downward-sloping wedge formation that we’re in. And these are interesting patterns because as you get closer to the apex, the volatility is dying down, the downward momentum is ebbing off.

And now we’ve got this strong move high here. There was a bit of volume in this move as well. We’re starting to consolidate. We’re really testing up against trying to break out of this pattern. Maybe this is the start of something interesting.

I’m looking at the moving averages as well and, for me at the moment, the moving averages, they look like they’re turning up, but they haven’t crossed yet. So I’m not about to get into this stock just yet.

But look, if it continues to chop around in this consolidation, like, it might do something like…maybe we see something like this develop. That’s, you know, that’s possible over the next few months.

It could be really an interesting move here. You know, you could see a move back up here and it’s a really good asymmetric risk-reward sort of trade because you can enter this sort of stock on a breakout.

You know, like, say that, hypothetically, that was a price action, you could enter a stock like that there and you could have a stop loss on a stock like this potentially. If you want to be fairly aggressive with it, you could even do like a stop loss there.

So you end up with a trade where you’re risking… What’s that? Yeah, maybe you’d make around 20%, you know, 16% to 20%, something like that, and you’ve got the potential of, you know, up here in your highs.

So you play those odds every day. Like, of course, not everyone’s going to work out, but you play those odds every day, and you get enough of the ones that run with the right risk-reward parameters around them. You can make some really good profits.

So look, I think we’ll wrap it up there for this week. Let me know what you thought. Tell me if there’s anything you’re interested in.

Everything, of course, is general advice as it always is, so it’s not specifically tailored to you.

And, yeah, look, go out, find some good trends this week, and let me know how you go. Until next week, I will see you then.

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