Sunday, August 5, 2007

The Canadian market – Week in Review 30

Last week, the TSX composite had just broken down below support at 13,750 and was in a column of O after consolidating in a trading range between 14,000 and 13,750.

This week, it bounced off support at 13,550 (purple line & arrows) which was the previous June 27 low, and established a brief column of X before closing the week with a new column of O at 13,565.24.

Evaluation: This is the last significant support level before it reaches the long term bull trend line at 13,400. A break to 13,500 (orange square) would give us a target of 13,400 and a break to 13,350 (red square) would allow us to declare a new bear market. The support level at 13,350 (purple line), the May 1st level, is no longer relevant because the long term bull trend line prevails. Note that the rising 200 day moving average is currently at 13,277.47, a level which is lower than the trend line…! The bulls need to return to the game soon, or the game will be over.

The TSE Bullish % gave a serious warning when it crossed the 70 level downward and established a new column of O. This was a signal to change our strategy from capital appreciation to capital preservation. It gave a second signal when support at 60% was broken (red square with an 8 inside). This is a preliminary sell signal suggesting raising additional cash or hedging your portfolio.

Evaluation: We now stand at 54% which happens to be a previous resistance zone. Sometimes a previous resistance becomes a support. We shall see. The next significant area to watch is now the 50% level. Moving below with the TSX composite breaking the long term trend line would confirm that the trend has changed to a bear.

Nowhere to hide.
We present below, an evaluation of all the sectors of the Canadian market. Columns E to H evaluate the absolute trend for each sector:

-1- Health care is in a bear trend
-2- Consumer Staple, Technology and Utilities are in a bull trend and still rising (in a column of X).
-3- All other sectors are in a bull trend, and correcting (in a column of O).

Columns I to K evaluate the relative strength for each sector. In the legend below we sorted the different conditions by providing a score from +2 to -2.

-1- There are only two sectors with a Buy in a column of X or a score of +2. They are Consumer Discretionary and Materials.
-2- We have one sector with a Buy in a column of O or a score of +1, Industrials.
-3- All other sectors have rolled over with the worst score, -2, not very encouraging…

What precipitated the “correction” in the US is the relative weakness of small cap stocks in that market. The Russell 2000 index broke its long term uptrend line in July after a double top at 855 and is now trading at 755. Looking at the Canadian MidCap and SmallCap markets, we do not have the same situation.

The TSX MidCap is still in an uptrend. There have been two consecutive sell signals (red squares) since it reached a top of 975. The first potential support is the old resistance zone where a breakout occurred at 900 (orange zone). After that we have support at 870 (purple line and arrows) and then the uptrend line at 860.

The TSX SmallCap is much closer to its long term uptrend line of 750. Also, there are no significant support levels before we reach that trend line. All we have are 2 previous resistance levels which may act as support. We shall see…

In conclusion, I hope this review of the Canadian market from a Point & Figure perspective will complement the information you typically use to make up your mind on the future course of the market. That is the only objective.

The Word

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