Sunday, August 19, 2007

The Canadian market – Week in Review 32.

This week the TSX Composite broke through the 200 day moving average (13,327.04), then the March low of 12,661 and bounced back from 12,500 establishing a column of X which for now is a short term uptrend. I still don’t expect much from this bounce as there will be numerous resistance levels where supply will manifest itself, again.

-1- The first area of congestion will be the previous support at 13,250 (green rectangle) because broken support usually becomes resistance.

-2- For the short term trend to truly reverse itself, the market needs to break resistance at 13,650 (blue rectangle)

-3- The most likely scenario however would be the completion of an end of bull market distribution pattern called a head and shoulder, where the current rally would the formation of the right shoulder with a top in the area of 13,400 (purple square). The formation that I see here has been identified by the 3 purple arrows and the neckline would be at 12,500. I still believe we are now in a bear market. This long term trend will remain until the red bear downtrend line is broken (14,050 currently).

I always have to remind myself that “the trend is my friend”. There is a temptation to trade the short term bounces. However, I suspect the bear will wake up in the 13.250-13,400 region providing them with the last chance to short this market…

The TSE Bullish % is now valued at 36.94%, compared to a reading of 47.01% last week. This is bear market territory. For now, the bounce was not strong enough to change the bearish condition of most stocks in the index.

We present below, an evaluation of all the sectors of the Canadian market. The significant events are:

-1- Seven sectors had breakdowns as shown in the Last Event column compared to three last week. Metals and Mining and Energy moved from a bull to a bear trend joining Income Trusts and Healthcare.
-2- The bounce was lead by Metals and Mining, Energy, Finance and Materials (all are in a column of X).

An investment in the Gold iUnits provided a -10.5% return this week illustrating that investing in precious metal stocks was no protection at all.

The big event of the week was the breakdown of large cap stocks in Canada. The TSX 60 is now also in a confirmed bear market as show below.

The breakdown is shown by the red square at 735. We did get the bounce of the support level of 725 but for now the previous support (purple rectangle at 765) appears to be a good resistance level as the market closed below that level Friday. Another Head and Shoulder pattern may be forming here as well with a neckline at 725.

There is no question that the Canadian markets are severely oversold, even after the recent rally. The legitimate question is what would convince me that this is a correction and not the beginning of a long term bear market. The answer lies in two indicators that are used side by side to confirm any short term uptrend.

The first indicator evaluates the number of stocks which are trading below their 50 day moving average. Currently 7.45% of the stocks are. There would have to be a breakout above the 30% resistance level (blue arrow) to confirm that the current bounce is more than a bounce.

The other indicator which is used in conjunction (both indicators must confirm each other) with the 50 day moving average indicator is the High/Low indicator below:

It is clear that this indicator confirms the washed out condition of the market since 93% of the stocks are making new lows. A breakout above the 10% new highs resistance level (blue arrow) would be a good short term buying opportunity.

In conclusion, the bulk of the evidence still favors the bears. The Feds handling of the liquidity crisis demonstrates to me how inexperienced Ben Bernanke has been in handling what may prove as a major economic event. He finally reacted to the pressure he received from his friends in the financial community. This may be a case of too little too late however. This week coming will be another lazy summer doldrums week!

The Word


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