Please click on the graphic to see a larger chart
The well followed 50 day moving average ( Blue line - Blue arrow ) is currently trading at 12,000.61 as it started flattening in October 2011 because a well defined trading range had developped for three months ( Aug-Oct ) and since then we have seen the same pattern. I have identified this trading range with the two yellow bands which are supported by the volume by price histograms on the left side of the chart. The volume panel below shows that there was selling volume at the top of the range ( Red arrows )and buying volume ( Green arrows ) at the bottom of the range. Recently (mid December to now) the volume has been below the 60 days average of 201 million a day. Clearly momentum traders are waiting for a breakout above 12,500-12,550 or a breakdown below 11,500-11,450 before putting serious money at work. More conservative longer term "bullish" investors will wait for a clear breakout above the 200 days moving average ( Red line=12,699 ) wherever it is at that time to make an investment move and should the market be priced lower than the October 2011 of 10,848, they will all try to exit at the same time.
As we project 2012, we must be aware of the conditions described in the preceeding paragraph because human behavior is what it is: Greed and Fear. Short term, oscillators like The RSI ( first panel at the top of this chart - Grey arrow) and/or Stochastic ( second panel - Purple arrow ) show what you may have already read elsewhere: The market is not cheap: it is overbought.
If you are Canadian and you are serious about trading and your use of ETFs as a trading tool, you know that Larry Berman is one of the most respected technical analyst in this country. But he is more than that in my mind: he is a Chartered Financial Analyst (like me...) and thus he also looks and understands fundamentals as he usually presents a convincing case on the topics he chooses to analyse. Recently he make the following forecast for 2012 ( <<== click on the word forecast to read it)
He is basically bearish at least in the first half of the year which means that the yellow support band of the preceeding chart will be violated on the downside. But I have been wondering ever since what else he might be seeing:
Please click on the graphic to see a larger chart
This chart is a weekly chart which clearly shows a longer term very strong support zone which has held in check the correction (or downtrend) we have experienced since the 14,329 top. If we are to break below this support zone, it would mean that the March 2009 uptrend was a correction in a secular bear market which started years ago and if it is the case, we can kiss the concept of "Growth" goodbye for quite awhile. So the second very important level to watch this year will be the 10,850-11,000 support zone.
But before we get to go anywhere, we need to look at the short term picture because that is where we must make our money day after day:
Please click on the graphic to see a larger chart
-1- The short term trend is still up given that we have a higher high ( 11,900 & 12,300 ) and a higher low ( 11,500 & 11,750 )
-2- The last signal was a buy at the double top (11,900) breakout at 11,950 (White X on a black background)
-3- At the end of the week, the market reversed into a column of "O". Channel Support (White O on a blue background) is at 12,150 and a break below that would increase the probability of a more significant correction towards the breakout resistance point of 11,900 followed by the new longer term bullish support line at 11,650.
-4- The potential Head and Shoulder stealth accumulation pattern is still valid and as I said in previous posts, one should not be surprised to see a good number of X and O columns before we see an attempt at the formation's neckline.
-5- The market is in overbought territory right now favoring a pullback in the short term. However, I remain bullish until proven wrong because a lot of short term support has built up during the creation of this "right shoulder" between 11,650 and 11,900. Any reversal into a new column of "X" (or a 150+ point day) would convince me that the bulls have taken control and my target would be channel resistance ( White X in a blue background ) at 12,700 which happens to be the beginning of a strong resistance zone (12,700-12,850) and the descending 200 days moving average.
The prudent strategy for this week is therefore to remain in cash ( I am at 89% ) and to hedge your remaining long positions with the short(s) of your choice ( Please see Sectorial picture below ). I decided to use volatility of the S&P500 index (VXX.TO) because I think it will do better in the next few days should the market continue to the downside.
The Canadian Relative Strenght picture is as follows:
Please click on the Table to see a larger Picture
Green is good while Red is bad. A one (1) identifies the trend while a two (2) shows a potential reversal to the color of the Two (2). This is a very confusing market where short sector bets might be very difficult to do. However Energy, Financial S&P500 and TSX60 short instruments are cheap and that is usually when you should buy them for a week or two.
Pierre Brodeur
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