Please Click on the Image for a larger Chart
This chart looks at the TSX Composite index since early 2008 to the present. Last week, I presented both arguments as to the possible future behavior of this market. On the one hand, in the short term we have a formation ( Head and Shoulder ) which could be the beginning of a second Up leg in a bullish market. On the other hand, in the longer term we also have the same formation which could spell trouble should the low of October 2011 be broken down.
I measure market volatility with the Average True Range ( ATR ) of the past 14 days and we can see that it has been dropping from close to 300 points a day to 126 points a day currently and we are getting closer to the low which was achieved in April 2010. That's a good thing: ATR explodes on the upside generally during market downtrends. Any increase in this indicator from these levels would indicate an increase in "FEAR" and I would surely listen to this market message.
But the market is also short term overbought as mentioned last week and thus it may require another short term downtrend ( a or many new column(s) of "O" ) before it can attempt to breakout from the neckline.
Please Click on the Image for a larger Chart
I have been playing these odds despite a third breakout ( since the low of 11,450 ) this week at 12,350. The Point and Figure approach does not look at volume. However, we need to see a surge in volume if and when this neckline is to be broken out. If you look at last week's volume activity, you would conclude that there has not been any surge, yet. So as a typical trader, I am trading on the assumption that we are still in that trading range, until we get a breakout. If this is true, I will get another chance to purchase stocks and ETFs at a lower price. If we get a breakout, I will be forced to become fully invested for the next up leg of this bull market partly at breakout and partly during the subsequent pullback to the neckline which will become support.
The green arrow at 11,750 shows where the bullish support line is situated. The purple arrow shows where the neckline of this formation is. Finally, the blue arrow shows where the declining 200 days moving average is. On the chart we have MA350 ( purple ) is increasing at 12,850, MA20 ( black ) is increasing at 12,100, MA100 ( green ) is increasing at 12,050 and MA50 ( blue ) is decreasing at 11,950.
The number of overbought stocks has surged this past week. But what is different this week is the overbought nature itself. I randomly chose Great West Life as an example of what I am seeing right now on many Canadian stocks:
Please Click on the Image for a larger Chart
The Point and Figure chart shows the following:
-1- Price is above the bullish support line at $19 so this is bullish.
-2- The current high of $27 is below the previous high of $30 which argues for this uptrend to be a cyclical uptrend in a longer secular bear market.
-3- The Flag formation appears to have corrected the excesses brought about by the wide price difference ( Top $27 minus bullish support line $16 equals $11 ) which occurred in April 2010.
-4- The downtrend has been arrested at $19 which is now strong support because it also corresponds to the bullish support line.
-5- It is trading at strong resistance of $22.00 and that is because $22 is a previous support area, the first which was broken down indicating a correction in the uptrend.
This can be seen, with variations, in many Canadian stock charts. But I choose an insurance stock because their faith is tied to how well the market does given that their investment portfolio is very important for these companies. Thus Great West, Manulife or Sun Life are my favorite market bell weather securities.
Please Click on the Image for a larger Chart
This daily chart illustrates what we all know: we are in an overbought situation. The daily chart measures the trader's evaluation of the condition of a security. The RSI is at 87.86 while the Stochastic is at 97.72. The stock was overbought two weeks ago so that is not new on this daily chart. It is a sign of strength in the price behavior. The bottom pattern is quite positive and shows why there is so much strength: It is at the top of the trading range after building a clear double bottom formation, breaking above the 50 days moving average and challenging the 200 days moving average. Pretty exciting stuff...
But what is new is shown by the following weekly chart:
Please Click on the Image for a larger Chart
The weekly chart measures the longer term investor's evaluation of the condition of a security. I was a professional manager once, and I know that self managed Pension Funds and Money Managers evaluate weekly charts and develop longer term tactics based on these charts. Many Canadian securities hit the overbought status this week on the weekly charts as well, as shown by the RSI at 73.05. The stochastic is not there yet but is fast approaching.
Finally, a quick look at the Monthly chart shows decent evaluation with RSI at 49.53 and Stochastic at 24.28 which is encouraging for the longer term and the potential of a longer lasting bull market. But it is too soon to tell...!
Please Click on the Image for a larger Chart
In conclusion, this week aggravated the overbought condition of the Canadian market at the market level but also stock by stock. I usually use the following indicators to evaluate the status of exuberance:
-1- RSI and STO on daily, weekly and monthly charts: Trader's Overbought, Investors Overbought, Bull market potential is Positive.
-2- As a shorter term trader, I also evaluate valuation on the hourly time frame by looking at the spread ( difference ) between Price and the Exponential 70 hours ( 10 day proxy ) moving average and comparing this number to the daily exponential average true range of the past 14 days. If the spread is greater than ATR ( 14 ), we have a parabolic uptrend and a clear overbought condition. As of Friday's close, my screen flashed numerous stocks in this condition.
Pierre Brodeur
0 comments:
Post a Comment