The market spoke loud and clear on low volume...

There is no doubt in my mind that the market passed with an A+ on all the tests it had to go through since the latest low of 11,450. A reversal of the trend to up with a bullish support line currently at 11,850 and climbing. We are now on our fourth consecutive double top buy signal which is enough to expect some kind of pause in the uptrend. But the Head and Shoulder neckline was broken after the third signal and my discipline got me to enter with one half of a full long position as discussed in a previous post. However, given the fact that it is over extended in the short term, I also purchased levered contra positions should the market back off or goes nowhere: I call this my insurance policy.


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Of course, there are always reasons to worry and next week will bring its share of new economic reports. But the Fed's decision to reflate financial assets by keeping interest rates low until 2014 will be forcing investors and traders to seek riskier assets because the real return ( interest rate minus inflation ) for money market instruments and equivalents will now be negative. At some point in the future, we should see a yield strategy bubble followed by a stock market bubble but that is in a distant future...

In the meantime, stocks are still overbought in the short term and we are approaching significant resistance in the 12,700-12,850 region and we should expect a pullback to the neckline before the next leg starts. Notice that the channel resistance is currently: 12,700. This is the third time we see this level for that indicator. Also notice that we are currently on a [-2] signal and therefore it explains why I decided to hedge my positions for the week-end at least. Should the market break down below channel support at 12,450, we will receive a [-3] signal telling us that the odds have increased for a more important pullback ( not a new bear market ).

The Canadian Financial sector has been the first to correct down and I would follow this sector closely because a turn around in relative strength will confirm the end of any correction. Real Estate has also been leading on the downside. Material stocks have not yet started their descent because of the out-performance of Gold stocks but they should follow eventually.

If I am right on what I am reading from the market, generally since last summer we have gone through a giant stealth consolidation which I translate into invisible institutional accumulation. On the expected pullback, there may be a last chance to put on some investment assets at risk before the next leg starts its ascent. The tools that we need out of the toolbox is now the Fibonacci retracement tool and the indicators that most market participants follow, the moving averages.

I will show two examples of stocks which will illustrate my points.

A Financial: Canadian Imperial Bank


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All can see the trading range between $68 and $77 since the summer. It is therefore no surprise that after breaking out above the 200 days moving average the stock hit a wall at resistance. But what is more important to me is to be prepared for two exclusive scenarios:

-1- If the MA200 acts as support and then the stock breaks out of $77, one needs to act decisively on this information.

-2- On the other hand, should MA200 not act as support, using the Fibonacci tool, we should expect support in the 38.2% to 50% range and where the blue 50 days moving average is situated near $75.46. This would be an ideal area of accumulation.

A Material: Teck Resources


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Teck has always been my stock barometer of the Canadian market. It too has hit a wall at $44 recently but the uptrend is much clearer. The Fibonacci tool is where we should expect a pullback and the 50 days moving average at $37.52 is the ideal accumulation area.

Pierre Brodeur