ASX 200’s Worst Two Weeks This Year: Is a Bigger Fall Coming? | Episode 259

By Jason McIntosh | 1 November 2024

ASX 200 Pullback: A Technical Analysis Perspective

The Australian Securities Exchange (ASX) 200 has experienced a significant pullback over the past few days, raising questions about market direction and investor sentiment. Let’s dive into a technical analysis of this recent market movement and what it might mean for investors.

Key Points:

1. The ASX 200 has dropped below its 50-day moving average
2. Prices have broken through the support zone around 8,100
3. The index is now testing its 100-day moving average

Understanding the Pullback

The recent reversal from October’s high was a clear sign that more consolidation was on the horizon. This pullback has retraced most of October’s gains, indicating a potential shift in market dynamics.

Zigzag Pattern Emerging

The current pullback has taken on a classic “zigzag” appearance, reminiscent of a lightning strike pattern. This sharp movement suggests increasing nervousness among investors, possibly due to the upcoming U.S. election and other global factors.

Technical Structure: Has It Changed?

Despite the recent pullback, it’s crucial to consider whether this movement signifies a change in the underlying technical structure of the market. Here are some key observations:

1. The ASX 200 remains above rising moving averages
2. Both 50-day and 100-day moving averages continue to trend upwards
3. Dips below moving averages are common in bullish markets

Historical Context

To put this pullback into perspective, let’s look at similar situations in the past:

1. 2020-2021 Rally: Multiple pullbacks occurred during this strong uptrend
2. 2010s Market: Choppier upward trend with frequent dips below moving averages

When to Be Concerned

While pullbacks are normal, certain conditions can signal a potential trend change:

1. Prices falling below moving averages
2. Moving averages rolling over
3. Price consolidation beneath declining moving averages

The Benefit of the Doubt

In most cases, it’s prudent to give the incumbent trend the benefit of the doubt. Pullbacks within upward trends often stabilize and turn higher. Constantly expecting the worst can lead to missed opportunities and difficulty in generating returns.

Key Components of the ASX 200: Materials and Financials

The ASX 200 is heavily influenced by two crucial sectors: materials and financials. Let’s examine their current trends and implications for the broader market.

Materials Sector: Mining Stocks in Focus

The materials sector, primarily comprising mining stocks, has shown resilience:

1. Impulsive Rally: A strong bullish move pushed prices above moving averages, driven by Chinese stimulus measures and speculation.
2. Current Correction: Recent price action has been choppy and overlapping, pulling back to moving averages.
3. Bullish Interpretation: This pullback appears corrective rather than a trend change, suggesting underlying strength.

Key Takeaway: Strong performance in materials provides crucial support for the ASX 200.

Financials Sector: Big Banks Leading the Way

The financials sector, represented by the ASX 200 Financials ETF, continues to show positive momentum:

1. Upward Trend Intact: Rising moving averages (50-day and 100-day) indicate a sustained uptrend.
2. Price Above Averages: Despite recent pullbacks to the 50-day moving average, prices remain above key levels.
3. Historical Context: Similar pullbacks have occurred previously without disrupting the overall uptrend.

The Power of Trend Following: Giving the Benefit of the Doubt

1. Resist Overreaction: Avoid anticipating trend changes with every pullback.
2. Stay the Course: Remaining with the prevailing trend often yields better returns than frequent exits and re-entries.
3. Avoid FOMO: Exiting too early can potentially lead to missing out on significant upside.

Risk Management Strategies

1. Wide Trailing Stops: Implement stops below the 100-day moving average to weather short-term volatility.
2. Structured Exit Plan: Crucial for capital protection when market conditions eventually shift.
3. Avoid Hope-Based Investing: Replace hoping for the best with a well-defined exit strategy.

Conclusion

While both materials and financials sectors show strength, it’s essential to maintain a balanced approach. Give the prevailing trend the benefit of the doubt, but always have a clear exit strategy in place. This approach allows investors to capitalize on long-term trends while protecting capital during significant market shifts.

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Video Timestamps

For quick navigation, use these timestamps to jump to specific sections of the analysis:

00:00 Introduction

01:00 ASX 200’s pullback gathers pace (look what it just did)

03:30 Investors need to ask this key question now

04:40 Look what could happen next (it’s not what you may think)

08:30 These two sectors provide important clues

12:05 I didn’t expect the SP500 to do THIS

13:50 Could a familiar pattern be repeating?

Jason McIntosh | Founder, Motion Trader

Jason’s professional trading career began over 3 decades ago. He’s a founder of two stock advisory firms, a listed funds management business, and has helped thousands of investors navigate the stock market. Click here to read Jason’s incredible story of, at age 20, sitting alongside some of the world’s greatest traders (and the life changing experience that came with that).