Friday, August 17, 2007

Get me out at any price

Yesterday, we experienced a wild ride in a roller coaster. The damage was significant. The stocks that I follow (Canadian stocks, US stocks, and ETFs) as a group experienced the worst Point and Figure chart day since the last bear market. 80% of these stocks experienced a major breakdown of some nature with about ½ breaking their long term uptrend.
When one looks at the TSX 60 index (please look at chart below), which is a portfolio of the largest most liquid Canadian stocks available, using the traditional technical tools nothing really seems to have happened. The bull market uptrend line has not been violated so this must be a correction right? The 200 day moving average has been violated (MA 10 months) but that happened before in this bull market (blue arrows).


I suspect that what really happened is that a majority of institutions investment committees have now decided that we are in a bear market and they now want to get out at any price. Those following my analysis have known that for awhile now. Institutions have a very long term perspective on investing, and they need a lot of confirmation before they make a significant move. Being fundamentalists for the most part, I believe their economists and analysts have now turned bearish on the impact of this liquidity crisis. The retail investor was not there this time to pick up the stocks they were distributing so now they are dumping… I once was part of these investment committees so I know how it works…!

The S&P TSX 60 actually broke its long term uptrend line yesterday (O in a red square) as shown by the following chart. For institutions, that’s catastrophic:




During the day, the index bounced off the significant support at 725 and closed back up right on the uptrend line at 744.18. I will go on a limp and say that it’s too late. The technical damage has been done. Watch out below. If you are a retail investor, don’t try to bottom pick because I fear it’s going to get uglier, hear me Betty.

The other significant event yesterday was that the TSX Bullish % (gold line) as shown on the next chart broke a significant multi year support (purple line with 2 purple arrows are the support and the red arrow is the breakdown) and there now is a good probability that we are going down to the 30% oversold level (green line). We just need to be patient.


I will have more to say on market conditions in the next edition of the “Canadian market – Week in Review”. The best recommendation I can make right now is to get rid of your emotions, keep a cool head, and resist the temptation to buy anything you might consider cheap right now. It might get actually a lot cheaper as the madness of crowds sets in.

The Word
Therealword@gmail.com

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