We provided timely warning that the uptrend was under attack as signs of distribution surfaced progressively. Later, the point & figure bullish trend line was broken decidedly thus putting this market in a bear mode. But all is not lost at this time because the bulk of investors/traders do not use the same tools as I do for their “market call” and I therefore must respect their beliefs and monitor the market’s reaction to those beliefs.
One of my beliefs, beside the use of P&F for calling market tops and bottoms is the use of the 100 days moving average as my proxy for the long term trend. When this moving average was broken, it confirmed in my mind the bullish line breakdown that occurred earlier. Subsequently, the market rallied back up to this moving average which became resistance and the downtrend resumed.
The TSX 100 days moving average

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The majority of market participant belief is that the 200 days moving average is the true measure of a long term trend. We must therefore evaluate this indicator and look at the probabilities that it becomes support whenever the market is near that level.
The TSX 200 days moving average
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Using traditional trend analysis, we can identify the current resistance level which was the support level of the 3 days rally: 11,100. We can also see the bottom of the previous correction from 11648 to the low of 10,745. But before we get there we see that famous 200 days moving average which is at 10,915 at the time of this writing. If the majority of investors/traders believe that we are in a long term bull market, then they should start betting on that future by increasing their positions in the 10,800 to 10,900 zone. If this support level holds, we will have had a 10% correction from the top which is near the average bull market correction. If that level of support fails, then we are in for something even bigger on the downside…!
But why write about two slow moving averages which are “far away” (from a short term trader’s perspective) when the TSX was able to trace an intraday double bottom at 11,000 and then proceeded to climb back up above the previous close and more, closing at 11,223.12?
The TSX Short term intraday Point and Figure chart

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From a point & figure perspective, this double bottom was actually a higher low (11,000 & 11,025) and the close above the previous close was actually a short term breakout (11,125) buy signal followed by consecutive higher highs (11,100 & 11,200). The rising 200 days moving average is shown on this chart as a red horizontal line.
The first upswing off the low gives us a projection of 11,300 which is still below the bearish line at 11,525 and the channel score in now a positive +2 which validates the short term uptrend for the short term trader. However, the probabilities are that this is a bounce in an ongoing bear market because of the major influence from the bearish resistance line in this time frame and also on the longer term chart.
The TSX Friday 1 minute chart

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Friday was a reversal day as the bulls took over control near the psychological level of 11,000. As you will see on the longer term point and figure chart below, at the opening we should have a reversal into a column of X + an additional X if the market is able to hold 11,175 or above for the whole day. The more critical level to hold will be 11,150 for a three box reversal. The potential reversal is shown as “X” in a light yellow background in the chart below.
The TSX Long term Point and Figure chart

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This potential reversal into a column of “X” provides us with a preliminary price target of 11,600 which is well below the bearish resistance line of 11,900. We are still under the influence of a downtrend with lower highs (12.050 & 11,400) and lower lows (11,100 & 11,000) and the channel count is still a -2.
A reversal Monday will convert channel support of 10,450 into a +1 count. First resistance is channel X at 11,300, A breakout to 11,350 will give us a count of +2 validating any double top (11,400) breakout as a serious clue that the bulls have indeed taken over control of this market and there is a potential that the correction might be over because the price target will now be above the bearish resistance line.
But I would like to reiterate my respect for the long term bearish resistance line which is where the bears will start shorting again if the scenario above materializes. There will be tradable rallies but the odds now favor the short side.
Under these conditions, where 12,050 might be the top for many months to come, a trader must adjust both his management of risk and his return expectations by reducing the investment time horizon of all his trades until we see strong evidence that market volatility has been reduced significantly under all time frames. For me, it means that my stops will be tighter and point and figure buy and sell signals will be respected but for short term prospects only.
The level of risk

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The bullish % index is now in a column of “O” closing at 73.76 which is still above the over bought level of 70% and close to a double bottom (74%) breakdown. It is suggesting to me that capital protection strategies should be favored at this time.
Stock Selection.
Everywhere I look this week-end, I see a lot of technical damage stock by stock especially in cyclicals. The bounce from January 28th to February the 2nd has cleared up the determination of the correct downtrend line for a good majority of securities with the January 14th top as the anchor and the February 2nd top as the second valid point on the trend line. Generally, we would need two more days of Friday’s upswing move to break the confluence of this downtrend line and major resistance levels before one could hope for some type of reversal. However, reversals and especially bottoms usually take some time to form and mature into high probability breakouts. As I see it there is the potential that January the 27th was the beginning of a short term accumulation pattern. If I am right, there should be a short term trade opportunity on or near February the 17th. As always, I will be a respectful market observer looking for clues every single day but I will keep in mind that I must protect my capital first and foremost for the foreseeable future.
Have a good week
Pierre Brodeur ( The Word )
therealword@gmail.com
Notes:
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All current and previous charts of this blog are now available for download at the following link.












