canadianpointandfigure

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

2012-01-28T11:03:00.000-08:00

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.

Please click on the image for a larger chart

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

Decreasing Volatility and Overbought

2012-01-22T10:12:00.000-08:00

Last week, I showed that the market has been in a "trading range" for many months with the middle of that range being 12,000 or so. Traders have been used to this Up then Down movement and they have been selling the top of the range and buying the low end. Until there is a breakout above or below this range, you can bet that they will have the same behavior because in their mind, there has not been any trend to ride. The longer this range is maintained, the more explosive the breakout/down will be because nobody can say with certainty if this range is Accumulation or Distribution. The breakout/down will make it clear to everybody.

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

The TSX Composite Index is worth 12,000 !

2012-01-15T09:36:00.000-08:00

... or at least that is what the market has been saying since early August 2011. The following chart will help us evaluate the risk and return opportunities in the context of the recent history:

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

Last post of 2011

2011-12-09T06:49:00.000-08:00

The trading scenarios which I discussed in my last posts are still very much in force.

On one hand we have the potential for a right shoulder being drawn day by day. The fact that the market is not going up in a straight line is a very good situation. We could see a few columns of "X" and "O" before the breakout occurs.

On the other hand, we are still under the influence of the long term resistance line which currently resides at 12,150. There are four (4) levels of support towards the bearish scenario:

-1- Channel support at 11,900
-2- The previous double top at 11,800 which is now support
-3- The short term trendline (weak) at 11,500
-4- and the double bottom at 11,450

At this point, we only have a higher high (12,250 vs 11,800) and we now require a higher low (11,450 and ?) for the bullish scenario to receive a higher probability. For the aggressive trader, a reversal into a column of "X" any time before we break the low (11,450) would be a signal to add to long positions as the trend would now be up.

Please click on the image for a larger chart

As for me, as we enter the second week of December, I usually reduce my portfolio exposure to a minimum in order to enjoy a X-mas holiday which usually extends to the end of the first week of January. As we approached and then hit the bearish resistance line, I "exited on resistance" and my cash position is above 85% of my portfolio. I will come back to this blog in the second week of January.

May I wish a happy Xmas and New Year to all my readers.

Pierre Brodeur

P.S.: I would like to bring to your attention one stock which had an impressive series technical events in December.

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It's never easy

2011-11-28T07:14:00.000-08:00

The market does not make it very easy to understand most of the time. Today is no exception. The scenario we expected is not being delivered as expected. There is a twist...!

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This past Friday, the long term support line (11,500) was broken with a new low at 11,450. We now have a new long term resistance line anchored at 12,550 and sellers are now waiting at 12,150. When we have a one (1) box breakdown, there is always a possibility of a bear trap. That's the bullish argument. But until further evidence, we now have to treat any upswing as a corrective rally in an ongoing longer term bear market. That's the bear case.

Today's rally (at time of writing 10:30 eastern time) is impressive but there is a lot of resistance above starting with a short term resistance line at 11,750. We are still in a lower high and lower low environnement. I don't want to sound bearish but that's the current reality. We are under a [+2] channel resistance breakout signal which in terms of trading means that all my hedges have been sold.

For the bulls, there is still some hope and it is in the form of the head and shoulder that we have been discussing in previous comments. If this was indeed a bear trap and we get to navigate above the numerous resistances in the area of 12,300 to 11,750, then the market will surprise many players who may be bearish and/or sitting on the sidelines. This formation is still valid because the distance between the bottom of the shoulders is within the distance of the neckline.

The plan for this week is to enjoy the upswing and add to positions as the market breaks the back of the bears waiting at different levels of resistance. However, on the first sign of the bulls weakness (unable to hold support especially 11,450), the possibilities of a new bull market will be over and shorting will be the order of the day, and weeks, and months...

Pierre Brodeur

Where do we stand now?

2011-11-22T08:39:00.000-08:00

I have been unable to write an update this past week-end. There were just too many "signal" on the securities of my database and my priority is of course my portfolio trading. However, if by now you know my trading philosophy, you can guess that I had protection in this last downswing.

Because of time constraints (again), I am presenting a chart from stockcharts.com on the TSX index:

Please click on the picture for a larger chart

I am neither a bull or a bear. I watch prices and try to develop scenarios given what I see.

Today, as expected and hoped the market reversed into a column of "X" which might be the beginning of a low volume Santa Claus rally. You can see the left shoulder, the head, the neckline and perhaps the right shoulder of a bullish reversal head and shoulder accumulation formation.

It could fail, of course, especially if the market reverses and we get a double bottom (11,650) breakdown (11,600). That would be our second order of risk which is why I am still hedged at this stage.

The greater risk is a breakdown of the longer term (intermediary trend) support line which currently resides at 11,450 (purple arrow). If this breaks, it would confirm that we are continuing a longer term secular bear market.

However, there is a good chance that a right shoulder has just begun. It won't happen in one single column of "X". However, we now must see an equal or higher low to 11,650 to be convinced of this scenario. An uptrend from here is necessary in my mind (Higher Highs and Lows). Given that time will contribute to this scenario, I have identified a resistance zone (yellow) where a breakout of the neckline might occur.

This is the strategy I am currently basing my tactics on.

Pierre Brodeur

Next Post sometime next week...[day]

2011-11-12T09:00:00.000-08:00

I will be travelling this week-end and thus I will not be able to post a strategy for next week. Friday generated a new short term positive buy alert [+1]. We now have two higher lows with support at 12,100 (ST trendline) and 12,050 (double bottom). The double top (1 higher high) at 12,500 is resistance on this short term bullish ascending triangle.

Longer term, this looks like institutional stealth accumulation and therefore I am at a loss to understand why there are so many bears in various forum and blogs that I read from time to time. Sure, there are a lot of things to worry about, but that should not stop a trader from following the trend even if the media keeps presenting "end of the world" scenarios.

One needs to look at leading indicators of market trends and definately not at economic indicators being reported on a daily basis. These are lagging indicators. The market always looks six to nine months ahead and it is telling me that there is light at the end of the tunnel. I think the 2012 scenario is just a mirage.

Pierre Brodeur

The law of Supply and Demand and ... Style

2011-11-05T18:47:00.000-07:00

Not much has changed from last week as the trend is still up and the market is now hitting a short term resistance line extending from a previous high of 12,500 which also happens to be a potential double top supply area.

We have no definitive clue yet as to whether we are tracing a H&S accumulation formation or just went through a "W" or "V" bottom. It should all become clearer this week if the volatility remains relatively constant. The severe stock by stock overbought condition has been reduced as the majority of securities are now trading somewhere between over valued and under valued..

For next week, I would expect more gradual increases in market prices until we reach the resistance zone of 12,700-12,850, my immediate target for this current column of "X" (upswing). On the other hand, should we get a reversal into a new column of "O", I would be very quick to do whatever it takes to protect my portfolio because we would receive a [-2] channel resistance signal which would suggest another painful leg down with the potential of a breakdown which would confirm a downswing.

This week I would like to discuss MY strategy in terms of the style of professional portfolio managers. Every week I evaluate where the market is situated with respect to manager's style and I try to estimate the true potential of any uptrend. The reason I do this is that as I figure out the dominant style of the trader buying, I can also figure out the style of the seller and thus adjust my weekly tactics to where we are in the market because not all strategies work all the time. If you have interviewed prospective managers as I have done numerous times when I was a "professional" in the financial world, they will describe themselves with a specific style. I happen to believe that every "leg" of an intermediary uptrend is owned by different manager's types.

The uptrend starts with "deep value" managers buying the falling knifes. They are followed by "value" managers coming in typically once the bottom has been behind us. What follows is the most numerous type of managers in the industry, the "growth at a reasonable price" manager who typically will buy higher on the upswing once there is some confirmation that the trend has some more legs. Typically, a breakout above the 50 days moving average is when they wake up. The next type is the Growth manager who is willing to pay a higher price (and multiple) for a perceived or estimated higher earnings growth. Finally, we have the momentum manager who has received all the indicator signals required to play the momentum game all the way up to the top.

Many will cut the universe of available securities between large cap, mid cap and small cap and the TSX has done just that by designing such market sub indices. We can also divide the market between Value and Growth and also add Momentum to the mix.
Value managers will look at financial statements Book Value, Leverage and Dividend and compare these to the current market price in order to estimate value.
Growth managers will look at earnings,earnings yield, cash flow and revenue, they will make projections into the future, look at the analysts estimates and revisions of estimates and evaluate a purchase given the current market price. Momentum managers will look at Price and evaluate volatility, trading activity and momentum of price (derivative and second degree derivative) and then market price to decide on a trade. I would say that most Technical Analysts are momentum traders. That's how it works!

As a swing trader, I will use the following tools to estimate where we are in a trend, what are the probabilities of a reversal of trend, and how to get into a long or short trend with respect to the risk that I am evaluating:

-1- The long term Point and Figure "traditional" chart.
-2- The shorter term Point and Figure chart with a box size typically half or the long term chart.
-3- The daily candlestick chart with Ichimoku cloud.
-4- The 60 minutes chart with Ichimoku cloud.

I picked a Canadian Small Cap ETF (XCS.TO) as a random example. I cannot explain everything I do but will highlight some ideas. I currently own this ETF.

Long term P&F

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Small caps are trading above the long term support line of $10.50. We can observe a large bullish flag which has found support at $13.50 after a double bottom breakdown at $15.00. It is trading above this sell signal and will soon be testing double top at $17.00.

Short term P&F

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The flag is more apparent in this shorter term version of the previous chart. A first double top ($15.50) breakout ($15.75) buy signal was given and was followed by a correction with a bottom at previous resistance of $15.50 which clearly hints at demand for this ETF. A double top ($16.25) breakout would go a long way at increasing the probabilities of clearing the flag. Notice that the long term support line break at $13.50 was actually a "bear trap" as the ETF found support based on a July 2010 previous bottom.

Daily chart

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We need to focus on the Ichimoku cloud which I feel is an excellent tool to view support and resistance but also style purchasing and selling. Three times (red arrows) the ETF failed to breakout of the cloud which acted as strong resistance. We can see that when XCS broke above the 50 days moving average in July 2011, it was able to reach the top of the cloud. Momentum traders and Growth traders were putting selling pressure on the stock. We are now in the sweet spot again. Deep Value and Value managers have a position. Recently GARP (Growth at a reasonable Price) managers/traders have been buying the MA50 breakout and we can expect some selling pressure at the top of the cloud ($16.39) and later at $17.14 because that would establish a higher high. The risk on this position (stop loss price) is a breakdown below the cloud at $15.50 which is confirmed by the short term P&F double bottom of the previous chart.

Hourly chart

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I am showing the hourly chart because this is the tool that I use to enter or exit a trade. Depending on my evaluation of the risk and/or the type of "style" trader that I want to be, there are five different levels when I can buy the reversal of a trend from down to up. Buy 1 is the more risky while Buy 5 is less risky. In a bear market, Buy 4 and Buy 5 are often too far away:

-1- Buy 1 = Cloud breakout
-2- Buy 2 = EMA(70) breakout
-3- Buy 3 = MA(140) breakout
-4- Buy 4 = MA(350) or 50 days moving average breakout
-5- Buy 5 = EMA(465) breakout

These levels work for me generally. Notice that since the initial Buy 1 signal, small cap stocks have behaved very well given that the Ichimoku cloud has acted as support to the trend as it traced higher highs and lows.

I will generally exit a trade when there is a cloud breakdown AND a 70 hours EMA breakdown AND a 140 hours MA breakdown

Finally, if we use some of the elements which I described to determine who is currently buying and/or selling as measured by some of my tools, we can illustrate the risks and opportunities for the next week:

Stocks trading above the daily cloud

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These stocks are the most popular ones as they are being bid up for various reasons. These days higher yield, expectations of a cyclical upturn, relative performance in defensive stocks are some of the reasons.

This is a one level screen of my stock database. I would however suggest one adds other criteria of your choice to the reduce the number to tradeable ideas.

For example, column [BR] shows the relative performance of the sector the stock is in with 1.0 being positive, -1.0 negative ,+2.0 trying to reverse up, and -2.0 reversing down.

Also, screening by the long term point and figure status is something I do if only to understand the risk of the trade. Buying a bullish stock is less risky than buying a bearish stock.

-1- Column [BS] evaluated the LT trend with 1 bullish (trading above the support line) and 0 (or a pink square) being bearish.
-2- Column [BT] provides the last P&F breakout/breakdown signal with 1 being a breakout and zero a breakdown.
-3- Column [BU] evaluated the current swing. A 1 means we are in an upswing (column of "X") while zero is a downswing.

Stocks trading below the daily cloud

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Many of these stocks have had dissapointing fundamentals more or less recently. Looking at the long term Point and Figure profile at columns [BS] to [BU] will reveal a lot about their character.

Stocks trading inside the cloud coming from below (Resistance?)

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These beaten down stocks have been bid up by the value traders/managers. The cloud is now acting as resistance which means that only those stocks which the GARP traders/managers like will cross above the Ichimoku cloud. Technically the P&F columns will give you a clue but looking at the fundamentals along the market valuation and the earnings growth prospects will also help you figure out the best prospects.

Stocks trading inside the cloud coming from above (Support?)

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I will give you a hint here. This is the list that I focus on every morning BUT you will need a very good oscillator here to evaluate the short term prospect of the stock. During the week-end I evaluate the value and growth prospect of everyone of these stocks. This is my watchlist for the week. Once upon a time they were trading above the Ichimoku cloud and perhaps they were overbought ( pay particular attention to this OB/OS condition as often is the reason for the pullback) and some selling has occurred. I would expect the cloud to act as support other things being equal and thus I will now be looking at the technicals (is it building a base? is there a wedge, a flag, a triangle or any bullish formation being traced) in order to execute a trade at the appropriate moment with a maximum risk reward opportunity. Typically, I will wait for my favorite daily indicator to flash the beginning of an oversold condition before I plan the trade. That happens when the stock trades below the half way point (midpoint on the scale) of the oscillator because if it is a strong stock it will rarely reach the extreme oversold level but will trade around 20% below the midpoint.

Pierre Brodeur

For now it looks quite bullish ...

2011-11-02T17:07:00.000-07:00

This has been another difficult week, at least in terms of volatility. Investors are very nervous but the market appears to be climbing that "wall of worry". The TSX actually traced a higher low at 11,950 which follows a higher high at 12,500 so the trend is UP until proven otherwise.

Please click on the picture for a larger chart.

This is good in terms of trading because our immediate level of support (risk) is now higher than what it was this week-end. Recall that the double bottom was at 11,700 whereas now double bottom is now at 11,950. Indeed let us assume today's high of 12,300 is the high of this column. We would then have a lower high and the new lower low would be at the double bottom (11,950) breakdown (11,900). That's the traditional way of looking at this uptrend. For trading purposes, I submit that any reversal into a column of "O" is actually my signal that the bears have taken control, at least for awhile and profit taking would be my immediate move. That's because the upswing would not respect its very short term target potential of 12,750, the channel resistance marked as a white "X" in a blue background. Whatever happens, I believe that 12,700-12,850 is a zone of significant resistance which is also acting at the neckline of a significant accumulation formation which is currently tracing the head of a H&S. One should expect another "correction back to the 11,650-11,700 area with a few new columns of "X"s and "O"s before we get a major H&S breakout. Another scenario is that we continue the "W" reversal and as a confirmation I would use the Ichimoku cloud below:

Please Click on the picture for a larger chart

The recent market peak was reversed at the top of the Ichimoku cloud which is acting as resistance in this longer term traditional downtrend. It is the third time that the TSX is unable to move into a bull market defined in terms of this Japanese approach. A breakout will confirm the reversal pattern which has already been identified by the Point and Figure approach.

Pierre Brodeur

North American Markets are highly correlated ...

2011-10-28T17:30:00.000-07:00

... and therefore we are not surprised that this uptrend has broken the BEARish resistance line in all these markets as I mentionned in my previous post. The following charts I prepared for another forum illustrate this affirmation.

NYSE

S&P500 Index

NASDAQ

Russel Small Cap

Dow Jones Large Cap

The TSX Composite Index

It is clear to me that the US markets appear "ahead" of the Canadian market in their evolution if only because commodity based securities have been under pressure because of the perceived slowdown in the demand for these cyclical resources. A look at the bullish % charts and/or the # of stocks above the 50 and 200 days moving averages does confirm the same observation. Therefore, in my mind, the Canadian market WILL catch up and one should allocate a greater proportion of one's assets in Canadian in the next few months for that reason alone...!

This week's strategy

We present below my typical TSX Point and Figure chart:

Please click on the chart for a larger image

There is no doubt in my mind that stocks are currently overbought. The oscillator that I use , the RSI(9) is flashing that stocks will have lower prices in the next few days. As always, the question will be whether this is a pullback in an ongoing uptrend or something much more significant. With new support from the bullish support line, the odds favour a shallow down swing with the most probable support at the previous quadruple top in the 12,000-12050 zone. But given that there is no certainty in this world, the tactic should be to expect the market to respect channel support marked as a white "O" in a blue background at 12,200. Should we have a breakdown to 12,150, one should protect our long positions with the appropriate hedges (short ETF positions). Of course, the standard P&F double bottom (11,700) breakdown (11,650) would suggest moving from a 1 to 1 hedge to a short net position given that a test of the bullish support line at 11,200 would now enjoy a higher than 50% probability.

Pierre Brodeur

From bear to BULL

2011-10-27T13:18:00.000-07:00

It has been several months of difficult market behaviour. During that period, I really did not have anything special to write about because as a swing (trend) trader, the various consolidations were not offering me any advantage in my trading. I tried to go short several times and got burned. That told me to wait until the dust settled and suggested to me that I should stay on the sidelines until a new trend emerges. We are there now.

Please click on the chart for a larger picture

This new uptrend has been amazing. True to my approach, I took a long position at 11,650 when I received the first channel breakout signal. After that while the market traced a bullish flag between 12,050 and 11,700, I hedged my position with short positions with some damage as the next positive signal was a channel breakout at 11,950. But it's the double top breakout at 12,050 followed by the QUADRUPLE top breakout is where I loaded up on the long side ending up yesterday with a significant day loss. And Europe made its move and today was what it was...

The bearish resistance line has been broken today and that is very significant. Given that I am not fully invested yet, I now must wait for a overbought pullback to add to my long positions. I must NOT chase this market because typically, the corrections will move the market back to previous significant resistance levels, the next chance to load up.

Pierre Brodeur

While I was out ...

2011-09-05T08:03:00.000-07:00

... did I miss anything? My answer is nothing I wanted to be part of: volatily at the extreme and since I am not a day trader, it is best for me to ignore such an environnement.

First of all, I would like to say "hi again" to Lori who has become a follower of this blog and the previous one as well. We briefly met at the Stockcharts conference a few weeks ago.

I submit to you three (3) chart which will charaterize this market:

The bullish % index

Please click of the image for a larger chart

The % of stocks above their 50 days moving average

Please click on the image for a larger chart

The % of stocks above their 200 days moving average

Please click on the image for a larger chart

These charts describe a market which is under a lot of pressure when you look under the hood (on a stock by stock basis). However, the "correction" does not look so bad when compared to the bull market we enjoyed since early 2009. There is some debate whether or not this is a correction or a new bear market. My answer is: it does not matter. If you observe Price and can figure out the Trend, that is all that matters and you will be successful at investing/trading. Of course, I use the discipline of Point and Figure analysis to answer my questions on Price and Trend and a form of cycle analysis to identify significant break points (Channel analysis) and today we will observe what the chart is telling us and hopefully get a clear picture of what our strategy should be.

The Market TSX Composite Index

Please click on the image for a larger chart

There are a lot of things to highlight on this chart so bear with me:

-1- The bearish resistance line at 13,050: it confirms that we are in a bear trend. The market needs to break out above to change the trend. One should avoid any counter trend positions in stock in bear mode. The short side is the best approach for longer term time-frames (more than a few days). One must always remind on eself that in bear mode the market will be down more often than it is up and therefore we must focus on the short side.

-2- Support at 11,400-11,500 and Resistance at 12,750-12,850: These are my best guess for the new trading range (base building) required to reverse the downtrend at some point in the future. If the market does trade in this range, eventually it will hit the bearish resistance line (see the projection as a dashed red line) and we might see a structural trend change.

-3- The current shorter term trend is still up given that we have a higher high (12,400 and 12,750) and a higher low (12,000 and 12,100). Friday, the market reversed into a column of "O" of three (3) boxes. As a swing trader (if I was invested) I would wait for a channel support breakdown (white O in blue background at 12,450) to exit any swing long positions given that we are currently under a channel +3 bullish signal. That's because there is still a probability (not a strong one) that this upswing is supported and eventually generates a second double top breakout at 12,800.

A few words about Canadian stocks: many have Friday traced island reversals which is not good for this rallye as it breaks the back of this upswing. Caution is warranted and if you are looking at buying on weakness, remember to focus only on stocks and/or ETF which are supported by a bullish support line and are trading in or above the Ichimoku cloud; I see 24 stocks (mostly gold or high yielding type) and 10 ETF (mostly gold or inverse) out of a total of the 127 securities that I follow.

At the sectorial level, the situation is not pretty either. The following sectors are in a relative strenght bear trend: Energy, Mines and Metal, Financials, Industrials, Real Estate, Consumer Discretionary and Consumer Staples. Technology is in the middle or turning bearish while healthcare is trying to turn bullish. So we have a one trick poney (or maybe 3) with Gold, Materials (because of Gold), Utilities and Telecommunications still out-performing the TSX index.

While there is a very very small chance that the current upswing rallye is not over yet, it is prudent to expect more downside action in the foreseable future
to what we identified as our support zone of 11,400-11,500 (see P&F chart above) at least as a first step. Thereafter, using different measuring techniques, I would use 11,000-11,200 as the ultimate price target objective if this is bearish intermediary leg. If and when we get there, we will need to reasses the situation.
Pierre Brodeur
therealword@gmail.com

This market is extremely dangerous ...

2011-08-01T08:17:00.000-07:00

... because the World has now become extremely unstable. For awhile, the market climbed a wall of worry but when humans started behaving like chickens with no heads, reality took over and now additional growth is quite suspect. One of the news items last week was that Apple Computer has more cash than the US government and that sealed the deal for me. All my long positions have been sold including a substantial portion of my income producing assets and I now believe that we are moving from the initial trading range into a full fledged intermediary (and maybe) long term bear market.

The last week's technical damage to Canadian stock is significant in all sectors.

My next target is now somewhere between 11,700-12000 and I have decided to extend my summer vacation for the next few weeks. I will be back with charts after this vacation

Pierre Brodeur

Intermediate trend critical

2011-07-24T11:10:00.000-07:00

I have time constraints this week-end. I am actually supposed to be on vacation as is the practice in my part of the country where construction workers "en masse" all leave during the best two weeks of the Canadian summer (best as measured statistically).

Late this week the market generated a third consecutive double top breakout on this short term uptrend. Then Friday we had a bearish resistance line breakout at 13,500 which now provides a new longer term support with a new bullish support line at 13,100. A breakout above the channel resistance of 13,500 would go a long way in convincing me that this is the real deal. If we go back to last March (Black arrow) we had a similar set-up which failed miserably with a subsequent long descent back below 13,000. At that time we had a strong [+3] channel bullish signal and support was channel support at 13,750. The breakdown below that level got us out quickly.

Please click on the graph for a larger chart

The situation now is similar and different:

-1- We are at the beginning of any significant thrust with a [+1] signal. In March the signal was [+3]

-2- In both cases channel support is three boxes down on any 150 points market reversal

-3- In both cases, the market is quite overbought especially at the stock by stock level.

For this week, my most probable scenario is a challenge of the new bullish support line to eliminate the excesses (optimism) of this current move followed by a resumption of this short term uptrend which would be converted into an new intermediary uptrend

We shall see

Pierre Brodeur

We must keep in mind THE TREND ... always

2011-07-10T08:33:00.000-07:00

We are all aware that the market drew a double top in March and April at 14,300 and since then we had two bearish resistance lines with the current one at 13,650 and a brief bullish support line in between. The Point and Figure approach clearly says that the larger trend is DOWN and as of today, this trend can only be reversed with a clear breakout above 13,650 and some convincing technical evolution after that breakout. It's that simple. The chart below shows where we are in the process ...

Please click on the picture for a larger chart

... and there is no doubt that we have been experiencing some sort of summer rally with a shorter term trend that consists of higher highs and lows. Over the past few days however, the market has not been able to move to the next box at 13,500 (a natural resistance area Fib 78.6%) after trading above the 50 and 200 days moving averages. This is because the sectorial rotation has been extremely high during the past week or said another way the hidden internal volatility has been very high. This is not shown by traditional measures of volatility like standard deviation or Average True Range. But it is there. Also, the short term price objective is situated at 13,500 as well. On the surface, all appears to be well except perhaps for measurements of overbought being somewhat high at the security by security level.
We are under the signal of a channel resistance breakout for a score of +3 which is very good but we have become cautious and here is why:

Please click on the picture for a larger chart

This chart may appear somewhat strange at first glance because the price activity of the market (daily candlestick bars) have dissapeared. I have done that because I want you to focus on "the flow" or the swing movements of the market which can be seen by the red and green bands of the ichimoku clouds. This is a hourly chart of the market which you can compare to the earlier chart. At this stage, given that I like to trade the swings of the market (up or down), I would argue that the probabilities favor a resumption of the intermediary down trend. However, my highest probability scenario favors a higher low (higher that the previous low of 12,850 - see P&F chart above) creating a favorable stepping stone for another attempt at breaking that downtrend.

Therefore, we are still in some sort of trading range but we are probably building a strong base before the bulls can think of finally taking over the momentum from the bears.

Pierre Brodeur

All systems green

2011-06-30T04:40:00.000-07:00

If you are a swing trader, yesterday's action was quite impressive with a second double top (13,150) breakout at 13,200. The short term trend is ever more positive and a summer rally appears to have started. This means that you must ignore volume during the summer doldrums...!

Please click on chart for larger picture

Keep in mind that we now are fighting a wide resistance zone with the 200 days moving average at 13,324.03, and MA50 days just above at 13,453.26. A break to 13,250 would provide a channel signal of +3. I suggest managing risk tightly and any reversal into a column of "O" should be acted upon immediately. For now, I am treating this as a bounce but I want to be long.

Pierre Brodeur

Let's talk about risk ...

2011-06-26T08:40:00.000-07:00

... and let's talk about volatility!

There are many definitions of risk out there:

-1- for a trader I think it means where and when do I start losing money on my trade.

-2- strategically, I think it means when will the short and medium and long term trends change from bullish to bearish for the market(s) and its constituents.

-3- in the short term, it might be a synonim to volatility

Please click on the chart for a larger picture

It think it is pretty clear that as far as the Point and Figure approach is concerned the long term trend is now bearish (the bearish resistance line is 13,650), the intermediary trend is also bearish with significant high and lows being lower, but the short term trend looks bullish with higher highs and lows. But will it last?

At this stage, I could argue either way. The strenght of support is +2 while that of resistance is +5. Who do you think controls the market right now? Who do you think will win? I made a contribution to the bull side this week and after enjoying a great return in the first few days of the week, I ended the week with 10% of my so-called great return Friday night. So like many others, I might be frustrated right now. Currently I can see the same set-ups I saw last Friday but at the end of this week-end, I have zero new ideas going into Monday morning trading...!

TSX Bullish %

Please click on the chart for a larger picture

For me, this is a classic for estimating risk. For you info, I added the current level and high of all other North American markets at this time. There is still room for the market to correct toward the more "normal" level of 50% BUT notice that we are near the level of the previous low. A reversal of this statistic would confirm a new uptrend.

Number of stock above the 200 days moving average

Please click on the chart for a larger picture

That's another statistic that I follow to measure risk. There has been a substantial deterioration to 44% BUT its not the first time it happened in this uptrend. We are now near the previous bottom as well.

On a stock by stock basis, the technicals are very depressing. These need to be improved, and there are two ways to achieve this objective: The creation of a basing pattern at the market and stock level and/or TIME. Should we get a positive reversal confirmed by the risk indicator of YOUR choice, one should begin trading the survivors, that is to say those stocks that did not succomb to the bearish correction. There are not that many in my database. AER, BAM.A, BCE, CNR, ENB, ESI, FM, GIB.A, PPL RCI.B, T and TRP.

I should also mention the Real Estate ETFs. Further down the road, getting more agressive could be a good tactic once the dust is cleared.

Pierre Brodeur

Bullish or bearish?

2011-06-22T13:08:00.001-07:00

In terms of the intermediary trend, there is a good chance that we may have a trend reversal towards the long side given that we had a double top (13,100) breakout at 13,150. But is this the beginning of a bear trap? I would argue that we need some type of base building here in order to prepare a good reversal to the downtrend we have experienced from 14,300 to 12,800. I actually mentionned that in my previous post.

Please click on image for larger picture

Notice the close on the 13,050 box which might be the beginning of a new column of "O". I can live with that unless we get a channel support breakout at 12,850 where I would be forced to hedge my long portfolio, again ... But for now the odds favor a possible bottom of such a column of "O" above the bottom of 12,800 but remember that we are now facing formidable resistance from 13,150 to 13,350.

In any event, the market did not like Bernanke's press conference from 2:00pm to 3:00pm EST as shown below:

Please click on picture for larger picture

Pierre Brodeur

Is this the beginning of ...

2011-06-21T07:17:00.000-07:00

... Summer (today PM) or of some sort of summer rally?

Please click on the chart for a larger picture

This morning, the market was able to reverse, if only temporarely, the downtrend with a new column of X. This has the effect of negating our channel support estimate of 12,150 [FN-69] (Orange arrow) and reducing the risk substantially to 12,650 [FP-57] (Blue arrow) which is a good thing. Also notice that we only need another 50 points hike to reach 13,000 (a round psychological number) to generate a second positive channel breakout signal of [+2].

If we buy the bullish scenario, then the market has discounted one difficult quarter of economic slowdown. If we get another breakdown below double bottom support at 12,800, then the economic conditions will worsen and we should probably add another quarter of economic softness. Remember (Economy 101) the standard definition of a recession!

Many stocks and ETF gave an early warning signal of a trend change last night which means that agressive traders can nibble at very short term long positions. But we need to build a base here before we are convinced that the winds are now blowing towards the North pole...!

Pierre Bodeur

When will this downtrend STOP...!

2011-06-19T08:41:00.000-07:00

A lot has happened since our last post of May 30, 2011. Fifteen days later, only, after a clear bear trap rally up to 13,850, the market picture now looks horrible.

-1- The new and weak bullish support line at 13,400 was broken down

-2- The Support range of 13,100 – 13,350 was also broken which was my last area of defense before it became obvious to me that the bear have taken control of the intermediary trend and most possibly the longer term trend as well.

-3- Institutional investors monitor longer term moving averages (MA50 and MA200) because they are very good proxies for the determination of trends for institution’s investment horizons. Both the 50 and 200 days moving averages were broken down which now put the bears clearly in control of the situation.

Please click on the image for a larger picture

This time around, the channel support break at 13,700 [FL36] was not very helpful because it only flashed a [-1] alert signal. The bullish support line break followed by the double bottom (13,350) breakdown sell signal proved to be a serious warning to at least protect long positions. Subsequently the 200 days moving average breakdown sealed the deal for me. But this should not be a surprise to any reader as this was discussed in previous messages. Enough about the past, now we need to estimate the future and that is what we are now discussing.

As you can see on the chart, we currently have four vertical price projections (the last one is not shown on the chart for now) and we need to determine which one is the most probable.

-1- If we use standard technical analysis projections by measuring the distribution formation height between 14,300 and 13,250 (blue dashed line in columns [EU] and [EV]), we have a most probable price target of 12,200 as shown by the blue square in column [EV-66].

-2- I find it interesting that it also corresponds to the Fibonacci 61.8% support level at 12,200.

-3- Also please note that our current channel support in column [FN-67] is 12,150.

However, if you want to be more optimistic, one can use the Point and Figure vertical projection of the second peak of 14,300 in column [EZ-57] which is very close to the 350 days moving average of 12,633 as the potential support level for the short term bounce every trader on this planet have been waiting for…! For me, the 350 days moving average is the last line in the sand which tells me that the long term trend is either up or down for a significant period of time. For me, it’s the difference between an intermediary correction, or a new cyclical or secular bear market.

If we get a bounce, it is important to know that our previous wide support range is now a formidable resistance range from 13,100 to 13,350 and that range also includes the 200 days moving average. The most probable scenario is for a new wide trading range between 12,600 and 13,250 before we can figure out if this market wants a resuming bull market or favors the new bear market. There is no doubt that the market sees a tough 3 months of economic slowdown and maybe more, but for now it is not discounting a global economic recession.

At the stock by stock level, the technical damage is quite awful in my database of 200 + stocks and ETFs. Teck Resources which was presented as my benchmark for the Canadian market failed at the estimated resistance of $52 and broke down confirming severe bearish pressure and institutional distribution.

My watch list has shrunk dramatically. As an example, here is the list of securities which are:

-1- in a Point and Figure Bull market that is trading above their bullish support line

-2- AND are trading above the 200 days moving average; note that many of these are trading below the 50 days moving average

-3- AND are trading in or above the daily Ichimoku support cloud

Ticker Name Friday Closing Price

AER.TO Groupe Aeroplan Inc. 13.23
BBD-B.TO Bombardier 6.98
BCE.TO Bell 37.21
CGX.TO Cineplex Galaxy 25.78
CNR.TO Cdn National 73.41
ENB.TO Enbridge, Inc. 30.26
FTT.TO Finning Intl 27.65
GIB-A.TO CGI 21.40
HBU.TO Horizon Bull Gold ++ 19.73
HUG.TO Horizon Gold COMEX + 15.74
PPL.TO Pembina Pipeline Corp 24.01
T.TO Telus 51.77
TCW.TO Trican Well Services 21.27
TRP.TO TransCanada PipeLines Ltd. 41.27
X.TO TMX Group Inc 43.70
XRE.TO iShares REIT 14.82
XTR.TO iShares Monthly Income 12.24
ZRE.TO BMO REITs 18.30

Pierre Brodeur

Trading the potential trend reversal

2011-05-30T07:30:00.000-07:00

Some time ago, I was asked how I trade the potential trend reversal from down to up. Today, I will try to look at this from a market and then on a stock basis keeping it simple for now as it can get more complex. But first let us look at the market:

Click on the picture for a larger view

I think it is safe to say that, for now, the market is behaving like I expected. It has recaptured the long term bearish resistance line with a recent break above 13,800 after reversing just above the massive support area that we identified some time ago. Reistance is 200 points above at 14,050 while immediate support is channel support at 13,700. This uptrend is supported by a +3 channel signal at 13,600 and a new long term support line at 13,400. If you followed the discipline, you entered a long trade at 13,550 and enjoyed a 300 points ride up to now. We are now in the middle of this wide ( approximately 1000 points) trading range and our expectations should be to buy near the low and sell near the high of this trading range.

We need to remember that the market is a discounting mechanism and therefore since early January it has been discounting what we are now learning about the slowing economies around the world, the debt problems in Europe and so on... I believe that at some point in the future, the market will start discounting an improvement in all these economic and political variables and new highs will be made. For Canada to benefit from this, we need to identify a bellweather stock which will help us identify a real change of trend ( the next bullish leg of this bull market). It needs to be liquid, widely held and well known by the world institutional investors. We present Teck Ressources Ltd (TCK.b.TO) for this challenge.

Click on the picture for a larger view

We have here a stock that has "corrected" 29.7% from its high of $64 to its low of $45. It is supported by a bullish support line at $42 so that it still has room for a continuation of its correction down to that level. For now it is bounded by support at $45 and resistance at $54 which is a pretty wide range of 20% which means that there is a potential short term trade here. We can also dream of a potential 42% capital gain should the price go back to the previous triple top of $64! But let us be more realistic and look at the risks of the trade:

Click on the picture for a larger view

This chart shows that the stock is in a pretty severe downtrend. In early May it broke below the 200 days moving average and just this past Friday it has regained this very important long term benchmark and now it is challenging the declining 50 days moving average. There are sellers just above at around $52 as shown by the red downtrend line and the bottom of the Ichimoku cloud. Now that we know where the potential sellers are, we can manage our short term counter trend bet by looking at the next and final chart:

Click on the picture for a larger view

This is a hourly chart that I use to identify Long and Short opportunities. For every stock, I identify short term support and resistance. I also "follow" MA10 days, MA20, MA50 and EMA65 which for me correspond to level of agressiveness in entry and exit of trades above and beyond the main reversal signal which is provided by Price crossing on the other side of the Ichimoku cloud. If we examine this trade that I made, the first signal was Price crossing above MA10 [Level 1 = Very agressive] quickly followed by cloud resistance break at $48.25 [I took this trade here based on other variable confirming a probability greater than 50% of a short term uptrend reversal]. Level 2 = MA20 crossing which came next several days later. We are now at Levels 3 and 4, the more prudent entry points which correspond to a breakout of MA50 and then EMA65. In many cases, these are trigger points to add to positions but in this case as mentionned in a previous chart, we must expect some supply around $52 and above.

Pierre Brodeur

Chasing yield

2011-05-23T11:21:00.000-07:00

Ever since the market came out of it's hiding of significant distribution and gave us a serious warning of potential change of trend with a breakdown from the bullish support line, the name of the game has been rotation out of cyclicals and into low beta and higher yielding securities. There are a few exceptions here and there like CNR a generally economic sensitive transportation stock hitting 52 weeks highs, but all in all the technical damage is getting worse, week after week, on an increasingly larger number of Canadian stocks.

Click on the Chart for a larger view

For the time being, we still believe that we are in a larger trading range whose boundaries would be support at 13,100 to 13,500 ( look at the "wall" of green support on the chart above) and resistance the double top of 14300 or roughly a one thousand point range. What is quite surprising is the fact that such a small range between support and resistance has caused so much damage in so many stocks and ETFs in Canada.

I use different models to determine trend, strategy and tactics and right now my dumb trend following model is very busy shorting numerous Canadian stocks. My portfolio is not there yet. As I mentioned in a previous market update message, a break below 13100 will confirm in my mind that things will get worse before they get better and short strategies will be preferred at that time.

Last time I suggested two different ways of determining the trend for securities, the point and figure trend and the Ichimoku cloud breakdown of it's support. As the market's situation evolves, I would suggest you also look at whether or not your favorite stock is still trading above the 200 and 50 days moving averages, the first being the most significant. You will be surprised at how many are trading below MA 200, which for me is the sign that many institutions may be giving up on these names.

Finally, during these difficult times for some, it is very important that you monitor on a daily basis the Canadian sector relative strength. The current message is quite clear and it corresponds to the title of this post "Chasing Yield" and parking your money into so-called defensive industries. If I am right, some time in the future after some stock by stock base building, we will have another chance to be long "Global Economic Growth" but it's too early for that right now.

All bets are off below 13100 however!

Where are the stocks now

In a P&F Bear market

ABX.TO Barrick Gold
AEM.TO Agnico-Eagles
AGI.TO Alamos
AGU.TO Agrium
ARE.TO Aecon Group Inc
CCO.TO Cameco Corp
CP.TO Cdn Pacific
ELD.TO Eldorado
GAM.TO Gammon
IMN.TO Inmet Mining Corp.
K.TO Kinross
PBG.TO Petrobank Energy & Ress
RIM.TO Research in Motion
YLO.TO Yellow Media Inc
YRI.TO Yamada Ress
ZJG.TO BMO Junior Gold

Trading below Ichimoku Support

AAV.TO Advantage Energy
ABX.TO Barrick Gold
AEM.TO Agnico-Eagles
AER.TO Groupe Aeroplan Inc.
AGI.TO Alamos
AGU.TO Agrium
ARE.TO Aecon Group Inc
ARX.TO ARC Resources Ltd
BMO.TO Bank of Montreal
BNP.TO Bonavista Energy
BNS.TO Bank Nova Scotia
BTE.TO Baytex Energy
CCO.TO Cameco Corp
CNQ.TO Cdn Nat Resources
COS.TO Cdn Oil Sands
CP.TO Cdn Pacific
CPG.TO Crescent Point Energy Co
CR.TO Crew Energy
ELD.TO Eldorado
FTS.TO Fortis, Inc.
HSE.TO Husky Energy, Inc.
IMG.TO IAMGold
IMN.TO Inmet Mining Corp.
IMO.TO Imperial Oil
K.TO Kinross
NGD.TO New Gold
NXY.TO Nexen
PBG.TO Petrobank Energy & Ress
POT.TO Potash Corp. of Saskatchewan, Inc.
PRE.TO Petro Rubiales Energy
RIM.TO Research in Motion
S.TO Sheritt
SJR-B.TO Shaw Communications, Inc.
SLF.TO Sun Life
SLW.TO Silver Wheaton
SU.TO Suncor
TCK-B.TO Teck Cominco
TLM.TO Talisman Energy
TRI.TO Thompson Reuters
XCS.TO iShares Small Cap
XEG.TO iShares Energy
XEM.TO iShares Emerging Mkts
XGD.TO iShares Gold
XIC.TO iShares S&P/TSX200 Capped
XIT.TO iShares Technology
XIU.TO iShares S&P/TSX60
XMA.TO iShares Materials Sector
XMD.TO iShares S&P/TSX MidCap
YLO.TO Yellow Media Inc
YRI.TO Yamada Ress
ZJG.TO BMO Junior Gold
ZJN.TO BMO Junior Gas
ZJO.TO BMO Junior Oil

Trading below MA50 and MA200 days

ABX.TO Barrick Gold
AEM.TO Agnico-Eagles
AGI.TO Alamos
AGU.TO Agrium
ARE.TO Aecon Group Inc
CCO.TO Cameco Corp
CNQ.TO Cdn Nat Resources
CP.TO Cdn Pacific
CR.TO Crew Energy
ELD.TO Eldorado
K.TO Kinross
NXY.TO Nexen
PBG.TO Petrobank Energy & Ress
POT.TO Potash Corp. of Saskatchewan, Inc.
PRE.TO Petro Rubiales Energy
RIM.TO Research in Motion
S.TO Sheritt
TCK-B.TO Teck Cominco
TLM.TO Talisman Energy
TRI.TO Thompson Reuters
XEM.TO iShares Emerging Mkts
XGD.TO iShares Gold
XMA.TO iShares Materials Sector
YLO.TO Yellow Media Inc
ZJG.TO BMO Junior Gold

Trading below MA 200 days but above MA50

SJR-B.TO Shaw Communications, Inc.

Generally, stocks that should be avoided or at the very least should be considered short term long trading opportunities only.

Are these lists of any help to anybody?

Let us finish this post with CHASING THE YIELDS. Here are the securities that I cover which will be paying a dividend in the next 1 to 11 days. But beware because some of them are trading below their 200 and 50 days moving averages [-25] or below their MA50 and above MA200 [-5] and most are trading above both which is proof that those stocks which are technically sound in most people's mind are those that are providing a "real cash return" to investors these days:

Tic Name Yield X-Date MA
ARX.TO ARC Resources Ltd 4.8% 3 -5
BNP.TO Bonavista Energy 5.0% 3 25
BTE.TO Baytex Energy 4.4% 3 -5
CGX.TO Cineplex Galaxy 5.1% 3 25
CNR.TO Cdn National 1.7% 10 25
CPG.TO Crescent Point En 6.1% 3 25
GWO.TO Great-West Lifeco 4.6% 5 25
POW.TO Power Corp. Of 4.1% 10 -5
T.TO Telus 4.2% 11 25
TA.TO TransAlta Corp. 5.4% 3 25
XFN.TO iShares Financials 3.0% 2 25
XRE.TO iShares REIT 4.2% 2 25
XTR.TO iShares Monthly In 6.3% 2 25
YLO.TO Yellow Media Inc 14.5% 3 -25
ZRE.TO BMO REITs 5.4% 2 25
ZUT.TO BMO Utilities 5.0% 2 25

Pierre Brodeur

Now is the time for a real spring clean-up …

2011-05-08T07:55:00.000-07:00

It has been awhile since my last quick update on the Canadian market. April the 20th was my last post and I must admit that since then I resisted the urge to add other very short term market updates because on April the 18th after the double top, I threw in the towel on a battle which appeared to be over for me as I said:

“These are difficult times for swing traders, and that is why I am generally on the sidelines managing the risk of my portfolio and avoiding significant bets on either side of the playing field. The easy money phase is behind us, and I know that I am not smart enough to benefit in this stage of a bull market. I will let others play this game.”

Subsequently, the market decided to trace a very dangerous broadening formation with lower lows and higher highs just before breaking the long term support line at 13,550.

Click on the chart for a larger Picture

Normally, I should become bearish on this market given that we now have a bearish resistance line at 14,000 to worry about. But it is not the first time this happens during this extraordinary bull market as we shall see below and therefore, we need more clues that this is the beginning of a bear market. I though I would discuss the current status in more detail in order to develop a longer term strategy and be ready for whatever the market gives us.

-1- I have been working with the hypothesis that we are currently in a consolidation phase ( a trading range) which is correcting all the excesses of this bull run. I think there is a good chance that we see the resumption of major accumulation by the institutions anywhere between now and 13,000. We have previously identified a major support range (in green) between 13,250 and 13,100. However if the market decides to exaggerate on the downside, we may end up at 13,000 which happens to be our current channel support level and the more important 200 days moving average (red horizontal line).

-2- A breakdown below MA200 would be catastrophic but a break below my trusted 350 days moving average (purple horizontal line) would confirm that a bear market is under way.

-3- As you can see at [FF-33] we are currently under the influence of a minus 2 channel signal which corresponds to a portfolio tactic of holding our income generating longs with appropriate market and sector short hedge positions taken on the double bottom breakdown at 13,750 [FF-35]. For the record, I do not own any cyclical positions at all and my focus is strictly on protecting capital.

-4- I still believe that we will have another long lasting up leg which will bring us past the previous highs of 14,300 but this will take some time. This correction will be a mix of market correction of about -10% and market staying in a trading range for a long period of time before another take-off stage. Of course, should the market decide to go the way of item -2- above, I will respect the will of this market.

A look at this bull market through one stock that I chose at random gives us a good perspective on what we may expect in the near future:

Click on the chart for a larger Picture

In 2010, we had such a pause which lasted into September. It was not pretty and it generated all kinds of warning signal on the Point and Figure chart of the market:

Click on the chart for a larger Picture

This is basically what I expect for the foreseable future.

The stock corner

The following Canadian stocks are in a Point and Figure longer term bear market mode and are trading below the daily Ichimoku cloud. I typically avoid these stocks because anything can happen and usually nasty surprises and volatility follow…

ABX.TO Barrick Gold
AEM.TO Agnico-Eagles
AGI.TO Alamos
AGU.TO Agrium
CCO.TO Cameco Corp
ELD.TO Eldorado
K.TO Kinross
PBG.TO Petrobank Energy & Ress
RIM.TO Research in Motion
YLO.TO Yellow Media Inc
YRI.TO Yamada Ress

The following stock is in a Point and Figure longer term bear market mode:

GAM.TO Gammon

The following stocks are still in a Point and Figure longer term bull market mode but they are experiencing some significant technical damage one of which is that of trading below the daily resistance of the cloud. I tend to monitor these stocks first for any signal of a trend change.

AAV.TO Advantage Energy
AER.TO Groupe Aeroplan Inc.
ARX.TO ARC Resources Ltd
BNP.TO Bonavista Energy
BNS.TO Bank Nova Scotia
CNQ.TO Cdn Nat Resources
CP.TO Cdn Pacific
CPG.TO Crescent Point Energy Co
CR.TO Crew Energy
ECA.TO Encana
FTS.TO Fortis, Inc.
FTT.TO Finning Intl
HSE.TO Husky Energy, Inc.
IMG.TO IAMGold
IMN.TO Inmet Mining Corp.
IMO.TO Imperial Oil
NGD.TO New Gold
POT.TO Potash Corp. of Saskatchewan, Inc.
POW.TO Power Corp. Of Canada
PRE.TO Petro Rubiales Energy
S.TO Sheritt
SJR-B.TO Shaw Communications, Inc.
SLF.TO Sun Life
SLW.TO Silver Wheaton
SU.TO Suncor
TCK-B.TO Teck Cominco
TLM.TO Talisman Energy
TRI.TO Thompson Reuters
VT.TO Viterra Inc
X.TO TMX Group Inc

This leaves us with the stronger stocks, for now…!

BAM-A.TO Brookfield Asset Management, Inc.
BBD-B.TO Bombardier
BCE.TO Bell
CGX.TO Cineplex Galaxy
CM.TO CIBC
CNR.TO Cdn National
COS.TO Cdn Oil Sands
ESI.TO Ensign Energy Services
FM.TO First Quantum Minerals Ltd.
G.TO GoldCorp
GIB-A.TO CGI
GWO.TO Great-West Lifeco Inc
MFC.TO Manulife Financials
MX.TO Methanex
NXY.TO Nexen
PPL.TO Pembina Pipeline Corp
RCI-B.TO Rogers Telecom
SC.TO Shoppers Drug Mart
T.TO Telus
TA.TO TransAlta Corp.
TCW.TO Trican Well Services
TD.TO Toronto-Dominion Bank
THI.TO Tim Hortons
TRP.TO TransCanada PipeLines Ltd.
WJA.TO WestJet Airlines Ltd

Food for thought …

Pierre Brodeur

… and the bulls are now showing up!

2011-04-20T03:48:00.000-07:00

Click on the chart for a larger picture

Yesterday, we had a reversal into a column of “X”, a first indication that the bulls may be fighting hard to keep this bull market alive. They don’t really have a choice now because the bullish support line is now at 13,450. This reversal means that the channel support which is at [FB42] is converted from a white “O” in a blue background into a [+1] which means that if I hold any double beta inverse sector or market ETF (which I don’t), I need to cover these shorts. At this point in time, I believe the bears still have a slight advantage because the difference between the [-3] resistance is 4 boxes while the difference between the [+1] support is 3 boxes. I will therefore be prudent in my trade execution

From the breakdown point, we have three (3) “O” so we know that from the previous resistance ( or top if you prefer) of 13,900 we count three “X” down to 13,750 where we put our new channel resistance (a white “X” in a blue background). This is the level where I can become convinced that the downtrend may be over. This level of resistance also corresponds to a previous support level so it has a little more weight in my evaluation of the current situation. If we get a breakout from channel resistance at 13,750, I need to get rid of my sectorial and market hedge positions as the probabilities of a double top (13,900) breakout have increased tremendously and this new upswing may be for real. Finally, based on the current channel resistance we have a channel support projection of 13,400 which will move up with each move up a box in the current column of “X”.

A breakout at 13,950 would be a clear signal to add to long positions

Pierre Brodeur

Markets are at a crucial juncture.

2011-04-18T08:30:00.000-07:00

Written at 10:50 AM

Do you remember the last “correction” which followed the first top at 14,300? The market loss 800 points or -5.6%, had a quick 3 box reversal to 13,650 and then proceeded to hit a low of 13,250 before making a new assault for 14,300. What we are experiencing now reassembles that first correction. The first leg down to 13,750 was not as dramatic. This was followed by a tame 3 box reversal and today we had the second downswing of this correction which, for now appears to have been arrested at 13,600 a level which does not correspond to any known support level except it being a round number…

Click on graphic for a larger picture

At this stage, we have had two (2) double bottom breakdowns and we are under a [-3] channel signal. However, what is more important to me is that our projected channel support level is right on the long term bullish support line at 13,350. Should the market break 13,350, I think we should not overreact yet since this is a wide support range from 13,100 to 13,250 which may come into play at that stage of the game. For now, we are still in a very wide consolidation phase, with a strong possibility that institutional investors start buying again at more reasonable levels where a double bottom at 13,250 might manifest itself. The first “correction” however was the start of a significant technical deterioration on a stock by stock basis. Of the 127 stocks and ETF that I follow, there are now 33 which are trading below their bearish resistance line. Furthermore, there are 49 which are now trading below their long term resistance level which I estimate using the Ichimoku cloud approach. These are difficult times for swing traders, and that is why I am generally on the sidelines managing the risk of my portfolio and avoiding significant bets on either side of the playing field. The easy money phase is behind us, and I know that I am not smart enough to benefit in this stage of a bull market. I will let others play this game.

Pierre Brodeur

How to improve your Point & Figure swing trading with Channel overlays.

2011-04-03T13:01:00.000-07:00

Today, as requested,I am writing a tutorial on my channel methodology which I have always integrated into my Point and Figure strategic approach. Point and Figure is a method which provides buy and sell signals on breakouts or breakdowns from easily defined support and resistance areas. I added “channel overlays” a long time ago because I wanted to measure the probability that an upswing (col of “X”) or downswing (col of”O”) was going to be greater in length than the previous column count. In a way, this is a definition of momentum. This whole approach was inspired by my readings in “cycles” in the early 1970's.

My starting point will be where we were the last time I discussed the Canadian markets. The main elements of information were:

The market reached a top at 14,300 right ON channel resistance ( white X on blue background). If we count the number of boxed from the previous double top (14,150) to the top we have three (3) boxes. Therefore if this uptrend (we are now looking at the longer term uptrend not the last col of “X” which I call upswing) is to continue because the buyers are anxious to get in they should manifest themselves at the channel support which I calculate by taking the previous support area (13,850) to which I add three (3) boxes or the white “O” in a blue background at 14,000.

Click on image for larger view.

If you want to understand the concept of assumed symmetry here, draw a line from the two tops of 14,150 to 14.300. Now draw a line from the previous bottom of 13,850 to the channel support point of 14,300. Do you see the symmetry? Do you see what I am assuming here? I am saying that if we have equal momentum (thrust) in this uptrend, buyers will not wait for the standard point and figure double bottom at 13,850. They will start buying before that well known support area. When channel support was broken at 13,950, I added the count of [-3] which I explained in my previous post and knew that sellers had taken control of this downswing. Subsequently double bottom (13,850) was broken and at the time of the last post we were at 13,500. What happened next was:

Click on image for larger view.

Level 13,500 happened to be the bottom of this downswing with a three (3) box reversal into a new column of “X”. At that moment we would count the number of “O” from the breakdown point to the bottom of the column [ET34 to ET 40] for a count of of minus 7. Therefore from the previous top at [EU24] we count down seven (7) boxes to 13,950 (white X in blue background) which is now our new channel resistance. Shortly thereafter, the market reversed again into a new column of “O” and I knew things would get worse before getting better (if you are long ...). The reversal “converted” channel resistance at 13,950 into a minus [-4] count which suggests more downside ahead. It also suggests that double bottom at 13,500 will not hold because the difference between the top of 13,650 and channel resistance at 13,950 is so great at -5 that it is clear that the bears are now in control. Another clue is the fact that the short term trend line was broken at 13,500... Then we have the next market move. We can now calculate the new channel support for this downswing which is the number of boxes between the high of 14,300 and the new high of 13,650 or 13 boxes. From the double bottom of 13,500 we apply 13 boxes for a channel support of 12,850 (Please see next chart)

Click on image for larger view.

As predicted we have a double bottom (13,500) breakdown at 13,450, a new low at 13,250 expressed by the new column of “X” at column [EW]. The support prediction at 12,850 is never reached by 7 boxes which is greater than the 5 boxes count we mentioned earlier. The Channel support is replaced by a new positive count of [+1] and the distance of 7 means that the bulls are serious in arresting this decline. They have had enough and stocks appear to be cheaper again...! And of course we were at the top of a wide support range of 13,200-13,100. If the bears had control, it would have been expected that the market would reach support at 12,850 and if that was broken during the same downswing, the worse (an intermediary trend reversal down) would have been confirmed because fear would have been the new norm. I hope you understand both the mechanics and the psychological analysis associated with this method that I created some 40 years ago. What follows is what happened since then. Go through each channel event and you will be convinced that this supplements the standard point and figure approach. For me, it is a major component of my swing trading approach and explains a good part of my portfolio results over the longer term.

Click on image for larger view.

Since then, we had the following events: Another support area at 13,250 was created which solidifies the wide support zone now from 13,250-13,100. The [+1] signal suggests reversing shorts A quick [+2] signal a channel resistance signals removing hedges. The double top (13,650) signals adding to long positions. The bottom at 13,850 adds a [+3] signal and more important provides a channel resistance target of 14,700. Anything below will suggest either a reversal or a consolidation. Anything above will suggest euphoria and greed. We shall see. As always, do not listen to the so called experts. Listen to the market.

Pierre Brodeur

End of quarter window dressing

2011-03-31T13:24:00.000-07:00

In the past few days, I have been very busy re-aligning my portfolio for the foreseable future, one that I forecasted in my previous posts. For now, I may be looking good. But when it comes to my portfolio, I will go with my forecast because that is the highest probability scenario but I will also adjust my level of "risk" by spreading my bets. At this time, I just want to show you two different "relative strenght" charts that are broadcasting the message of this market for the next quarter:

Gold exited the penalty box and should now lead

Click on chart for larger view

Real Estate's cyclicality in Canada is now up

Click on chart for larger view

These sectors, should be amongst the leaders in April and later. We should know why sometime in the next few weeks.

Pierre Brodeur

I don't like corrections

2011-03-14T07:48:00.000-07:00

My last message of February 17th warned of an impeding correction which I associate to an intermediary trend change and not the short term down swing that we go through on the long swing. As usual, the toys I use (I should have said tools...!) usually give me the market's message a little early perhaps before most quantitative models start warning their clients. When that happens, I start managing the portfolio for risk rather than return and so the stop losses attached to each position get a little tighter. As the market rolls over eventually, I know this is NOT a pullback of a few percentage to buy into (short term down swing). I let my stops kick me off the trend as it changes direction.

I do have a long record of being early on swing changes but unfortunately all that was erased in my initial blog.

I hate corrections because I work even harder during corrections as I need to make adjustment almost daily to every stock and ETF in my universe. And I have over 100 that I follow regularly!

In an upswing, from time to time, all I have to do is leisurely adjust my trailing stop losses and make sure I own the best performers in the best sectors.

In a downtrend, first I have to project downside price projections and once these are reached, I have to determine breakout points. What do this mean? Practically, once my downside target is reached, and that is the case right now for most securities I follow, I have to do stop loss in reverse in order to enter the trade on the next reversal of trend. Given that I don't like to buy in a downtrend, or I am not comfortable being a value trader, I identify the next UPSIDE breakout point where I am willing to enter a position with a tight stop loss if I am wrong. These point are usually close to important short term moving averages (10 and 20 are typical). But most of the time the market and stocks keep going lower and so I have to adjust my "gogains" (the reverse of stop losses) until the stocks decide to reverse their trend and then I am fully prepared to go long.

Of course all this is dependent on being bullish over the longer term which I am at least as long as the bullish support line is below market prices. So where are we now?

Market Price Objective:

Click the image for a larger picture

As we were climbing the wall of worries, our initial price projection of 14,100 [on which our correction warning was based] was reached and then surpassed with two new highs of 14,150 and then 14,300 and two breakouts of 13,950 and 14,200. The long term price objective was now replaced by 15,300 which is based on the column of "X" following the bear trap breakdown signal at 13,200.

But something happened on the way to the current high of 14,300. My trusted channel methodology announced a loss of upside momentum when channel resistance of 14,400 was not reached and thus we now had a warning of [-1]. On the reversal into a column of "O", my channel support of 13,950 saw a first breakdown thus we now had a more serious [-2] signal at 13,900 signaling to start tightening stops even more. This was followed by a higher low at 13,850 and a new column of "X", a final breakout at 14,200 with a high which corresponded to our channel resistance of 14,300 { a neutral signal thus we are still at a count of [-2] }. We will discuss the rest with the next chart.

Summary: We now have a longer term bullish price projection of 15,300 which is more than a full retracement of the previous bear market but at the same time we have been warned of a forthcoming price correction. Our channel discipline is:

[-1] Is a warning of a loss of positive price momentum. No immediate action is required except spend more time watching the portfolio on the monitor...!

[-2] Is a more serious warning of price divergence. This alerts us to tightening stops on long positions.

Let us see what happens next.

Click on the image for a larger picture

And the story continues... During the downswing that followed the current top of 14,300, many of my shorter term higher beta positions were kicked out. As we approached channel support 14,000, the tension mounted because the ADX of the Canadian leading stocks reversed into a downtrend as the number of positive Canadian leading stocks was cut in half. A third more serious signal was generated [-3] at 13,950 and the remainder of my positions were sold. The [-3] signal tells me to START hedging my longer term income generating portfolio with bear ETF. At this stage, it is prudent to purchase inverse single beta ETFs and wait for a confirmation of reversal. At worst, my portfolio is immunized and will generate zero$ capital gain/loss and will yield 3-4% income in the meantime.

The double bottom of 13,850 did not fufil its role as support and we received our first double bottom breakdown signal (13,800) since the previous bear trap signal at 13,100. Was this another bear trap? A preliminary downside price projection yielded 12,800 which is BELOW the bullish support line. Not to worry because in a bull market, we know that downside price projections are less reliable...!

Once the potential bear trap level of 13,800 was broken, we had to enter more aggressive MARKET bear positions and that is were we are right now in terms of portfolio exposure. Also, the number of positive leading Canadian stocks fell to 1 as of this past Friday...!

Where we are in terms of strategy follows.

Click on the image for a larger picture

-1- The preliminary downside price projection now stands at 11,900 which, if it is true, would mean the end of this "bull" trend. I think it is premature to base our strategy on such a projection and the reality is that the bullish support line is 12,950 and THAT will dictate our longer term approach to this market. Remember that Point and Figure bearish price projections in a bull market context have proven to be unreliable most of the time.

-2- There is a tremendous amount of support as we navigate down below. Weak support at 13,400 is followed by a range of support between 13,100 and 13,200. This is where I would expect a reversal at least in the short term.

-3- In terms of potential at current market prices, first we need to break channel resistance which is currently at 13,950 [white "X" in blue background] to reverse the [-3] short signal. That is a challenging objective because the market should find initial resistance at the previous double bottom of 13,850 first.

In summary, odds are that the market should reverse this downtrend on or before the 13,100-13,200 support range. If it does not, I would suggest that this market is in trouble which would only be confirmed by a break below the long term bullish support line at 12,950. On the other hand, our current strategy is still based on a market potential above 15,000 but we understand the risks of that projection and we have focussed on that in this post

Pierre Brodeur

Back and forth consolidation expected now

2011-02-17T15:04:00.001-08:00

The bad news is : Now that the price objective of our previous post has been reached, we see a high probability that a period of consolidation should now start. There is a good chance that 13.200 could be achieved during that "correction". I am not making any SPECIFIC price projection. I am just saying that in the near future, it could be painful for "longs" and therefore the stops should be tight at this stage.

The good news is: After this turmoil, if 13,100-13,200 holds should we get there (the worst possible short term scenario), the next leg will bring us to a very bullish 15,300 price objective!

If I find the time, I will write the specifics to this forecast in the next few days.

Pierre Brodeur

Don't buck the trend

2011-01-16T11:30:00.000-08:00

We all have "our unique way" to determine a trend. This market state is very dependent on one's investment horizon as the tools that will be used are dependent on the type of trader that we are.

When I began in this business in the early seventies, I was taught to be a long term portfolio manager. Over time however as I gathered experience monitoring and analyzing various market cycles, I came to the conclusion that I understood how to time the various legs and my trading time frame was shortened to that of a "swing trader". The forthcoming discussion is therefore from that perspective and may not suit longer term readers.

I view the recent market action as very positive for the future of this amazing bull market. The "regular" ( traditional units, reversal of three units ) point and figure chart below looks like a multi week consolidation ( pause ) to me. There is no doubt that there anxious buyers near the step double bottom support range of 13,100 to 13,150. They are anxious because they did not wait this time for the market to go all the way down to support.

In the same vein, given that the market hit the double top resistance of 13,500 Friday, it is normal to expect sellers to appear forcing a close just below that area. If I am bullish and the market does not convince me otherwise, then I expect another double top breakout at 13,550 sometimes in the near future and this will reinforce my confidence in another positive leg.

Click the chart for a larger picture

But why did we get such a consolidation? If we go back to October 2011, we hit a low of 11,500; then the market shot up to 12,150 for 13 successive "X" which allowed us then to project a price target of 13,450 as shown by the green and yellowsquare at that level. It is not unusual for the market to consolidate after reaching such a target, and this is what is happening, a beneficial pause before the next upleg which in my mind is guaranteed by the recent breakout at 13,400. Of course there is no guarantee in this business, but the odds favor more upside action.

The chart below looks at the future and it has a major impact on my longer term strategy and cash vs stocks mix:

Click the chart for a larger picture

Using the same technique as the previous chart, I can create a road map for the foreseable future because human nature remains the same and projections are based on the thrust of the market participants conviction. In this case, the level of conviction is less than the preceeding move given that after the bottom of, 13,100 we had a column of 8 "X" which translated to a price objective of 14,100. or 4.4%. This should be the level before the next consolidation. But there is a "rule" that I use which is that if the market retraces more than the Fibonacci 61.8% of the previous bear market, the odds are very high that it will then retrace 100% of that move. 100% is 15,150 or 12.2%. After that, I don't know until we get there...

The long term trend is bullish because market levels are higher than the bullish support line. The intermediate trend appears to be neutral because we currently have a Quasi trading range ( columns of "X" followed by columns of "O" ) somewhat limited by strong support bottoms and a strong resistance top. The short term trend is up because we are in a column of "X". In such a trading range, what the market does as an entity is not of any great value and the tools that you must use are quite different than when the market plugs along on the upside also relentlessly. If we look under the hood we will always see sector rotation during a period of consolidation as investors are re positioning their portfolio for the next forthcoming leg. The bears will setup the short positions while the smart money will rotate into the sectors & stocks which will provide them with the expected superior returns that their proprietary research is forecasting. As a one person research swing trader, I do not have access to this kind of research and therefore I need to listen very carefully day after day to the clues the market is willing to give me.

The best tool that I know to evaluate sector rotation in a trading range market is my own brand of relative strength (RS). I do this evaluation every single day after the close as it is a very important part of my market timing and stock picking process. The next day, If I am considering a long position I will only buy within sectors which are potentially reversing their downtrend in relative strength (2 ; more on that later) or already in a RS uptrend (1). Of course, for this task, I use point & figure chart as I find traditional RS line chart too subjective in their interpretation. The chart below on the Gold sector is a good example of the P&F RS chart.

Click the chart for a larger picture

You will notice that I use PERCENTAGE (0.50%) on $SPTGD divided by $TSX for this type of analysis. Then I look at different properties of the chart and I give a score for each qualities:

-1- Is the sector supported by a bullish (+1) or bearish (-1) line?

-2- How many double tops breakouts (+1 for each) or double bottom breakdowns (-1 for each) since the last reversal of trend ( breakdown if we are counting breakouts and the opposite for breakdowns)?

-3- In a new column, I score the reversal (the first three "X" as +1 or the first three "O" as -1) as one unit and any succeeding box (X or O) with a positive or negative one (1 or -1).

-4- Finally the final close will not always be at the last X or O and thus I will add or subtract the number of units required to get to the final close as shown by the red number at the end of the day. This is quite important to me because I want to know if the current column has a chance of being reversed in the next few days.

I evaluate the probabilities of such and event and if the probability is high enough, the sector will have a score of +2 is the downtrend has a chance of reversing up and a score of -2 for the opposite condition. I will not explain how I evaluate a potential reversal here as it is a function of each one of us risk preference and may be too specific for this general post. However, if there is interest, just ask!

The score for the Gold sector is therefore (-1-4-1-8-1) = -15

Several weeks ago, I started to look at individual gold stocks which were showing signs on their own of a potential bottoming of the downtrend well advertised by the media. Being somewhat contrarian when I look for bottoms I took an initial position in the is hares and one other individual gold stock. Early this past week, that trade proved to be wrong, at least in the short term, as the RS started flashing negative reversal for the sector. Given that I want to hold a bare minimum position in gold stocks for the forthcoming new up leg and that I know my timing will not be perfect on the reversal, I decided not to sell my position but rather to hedge that position with the double beta Horizon Gold Bear (HGD) therefore reducing to zero dollars any variation on that initial position. The result is that with only 60% invested, and with a market that did not do anything special this past Friday, I had my best one day $ gain in months...

I order to perform well under the current market conditions that I have described previously, you need to find a way to pick stocks which are the leaders in the Canadian universe of potential candidates. You want to buy them well which will be the topic of another post, and then follow their evolution at least on a day by day basis listening to the signals each position in your portfolio are giving you from time to time. In my case maybe 5 or 6 a day will tell me "something has changed for me, doctor please look at my health report". And it all comes back to the title of this post: don't buck the trend, nourish it and monitor it very closely. The best way I found to evaluate the trend of a stock is by evaluating the ADX of the stock. Again I can go in more details in a next post but suffice to say that stocks which have a positive DI+ and an ADX greater than 25 and rising, these are the leaders in the Canadian universe of investment opportunities. I always have a good proportion of these stocks in my portfolio and they usually explain a large proportion of my capital gains in a year. When they trade between 25 and 40 on the ADX scale they are expressing an increasing momentum of price and at some point in that range they will look expensive but as long as that derivative is positive you hold on to them and buy more. You see, the most expensive error that I have seen some of my colleague portfolio managers do in my career is selling a stock too soon AND refusing to buy a stock that is doing well because it looks expensive. Under certain market conditions, those are the stocks that will do better and you should own them until the stock start acting strangely. There are tools to evaluate that and perhaps the topic of another post some day.

Some will say: Just follow price and as a general rule it's fine. But what you need to do is look t the momentum of price and the momentum of relative strength.

Some will say: Let the price come to you. Again a good general rule but it really depends on market conditions. If I applied this rule, I would only buy at support and never on breakouts. Right now, we are in a bull market and thus the best stocks will have multiple breakouts along the way to the top. You want to own these stocks even if they appear expensive. Do your technical analysis. Now is the time to look at PATTERNS like triangles, flags, wedges as many are consolidation patterns and breakouts from these patterns if the risk reward is in your favor must be bought.

Point and Figure charting to which I have been associated is a great tool to measure market moods, trends, breaks, project price targets and develop strategies. But it is but one tool that satisfy one part of the development of TACTICS and the execution of the trades. Over time, I will give back to the community by writing about those other tools as well with the hope that it will make the reader a better trader. Technical analysis is definitely not tracing trend lines below or above what appears to be significant bottoms or tops of price swings. You want to find the correct trend line and that is an art, believe me.

This post has been longer than most because I am in an airplane somewhere over the united states on my way to my winter home (read: where it snows and is very cold) from my summer home down south where it's sunny and warm.. So I had time to write today

Pierre Brodeur

We all know that ...

2011-01-10T12:19:00.000-08:00

... the market needed to go through a correction because the whole world has been suggesting this for weeks.

Today the market printed two (2) more "O" on its long term chart nearing very strong support at 13,100 after correcting at my long term price objective of 13,450.

This is where the descent will probably stop because what the world may not have realized yet is that we are now back into cheaper territory as measured by RSI(7) and therefore the BUY mode should be ON to any valid signal.

Pierre Brodeur

The battle between Value and Momentum

2010-12-18T05:58:00.000-08:00

I am a lucky guy... As I am waiting for my flight to the sun this morning, I am using my new toy the IPad 3G to write my thoughts of the day. I have spent thirty minutes trying to figure out how to write this post directly on the web site with no success. I can't figure out how to force the IPad typewriter to pop up so I can write. Another problem to solve one day.

When I evaluate the potential of the market for the following week, I use my own brand of technical analysis and some quantitative tools I developed over the years to figure out the excesses of the crowd. As some of you know, I like to look at the TSX index long term point and figure chart to determine:

(1) the long term trend (the market is trading above the bullish support line which is positive),

(2) the short term trend (the market is trading in a column of "O" which is negative),

(3) and Friday the market gave a sell signal and then quickly reversed in the last 30 minutes to hint that this might be a nice bear trap. There have been 2 previous such false sell signal during this intermediary trend ("O" highlighted in yellow). Perhaps this is another. Let's us evaluate the odds by looking at the chart:

Click on the chart for a larger view

A simple principle of technical analysis which is really a market behaviour observation is that once a resistance has been broken, the probabilities are quite high that it will act as support on the subsequent counter trend correction. After the fact evaluation shows on this chart that resistance was 13,100 (Red Horizontal thick line), and that it was broken with a buy signal at 13,150. Subsequently a double top occurred. What is more important to me is that a double bottom at 13,150, JUST ABOVE implied support of 13,100, followed in the creation of this double top showing a balance betweeen demand and supply (buyers and sellers) until that support was broken this past Friday with a double bottom breakdown at 13,100! That's a Point and Figure sell signal which some people would act on blindly. But there is a good chance that this is a bear trap because "real support" as mentionned previously is actually 13,100
and not the double bottom at 13,150. In this case, I will become worried if and when THIS SUPPORT is broken early next week.

As an exercise, I would suggest you review what happened at 12,550 and 12,600 and evaluate like I did then why this also was a bear trap signal

Every weekend I spend a total of about 8 hours confronting the top down approach of the point and figure chart story with a bottom up analysis of all stocks in my database looking at weekly, daily and hourly trends and signals. It is a long and tedious task but it is well worth it because at the end of this process I know if the next week will be a risk on or risk off week for me.

Every week, it's always the same story of trading off value and momentum.

One can define value as the measure of your choice for being oversold over your investment time horizon be it weekly or daily or a combination. The things to remember about value are:

(1) stocks can remain "cheap" for awhile.

(2) buying oversold stocks whose trend is bearish is a recipe for disaster. That is why I only consider stocks in a bullish trend all the time for long plays.

(3) the buy signal will always be given first by the oscillator of your choice. For the record I use RSI(7) which does the job for me. But most of the time when that signal is given, markets are in a downtrend and the general psychology is negative. It is therefore very difficult to take value positions under those conditions as you must master your emotions and go against the current common wisdom.

You therefore require some type of confirmation before you take a position in a value proposition. For a swing trader like myself, it is a prerequisite that I have the ability to determine the "change of trend" not only for markets and indexes but also for individual stocks and ETFs. As you may have guessed the preferred way to evaluate a change of trend is to look at momentum data series which will confirm the initial value buy signal. The tools that I use for momentum are different for indexes and stocks because one must account for the fact that the volatility of each is quite different.

Over time in the future, I will discuss some of the indicators that I use to enter a value and/or a momentum trade if there is interest for such a subject.

For now however, in terms of market direction for next week all I know is that it WILL fluctuate. I am prepared to liquidate my remaining long positions ( I sold 50% of my core portfolio about 2 weeks ago) if the sell signal is not a bear trap and everybody runs for the exits which is quite unlikely. In fact here are a few fundamental facts favoring our Canadian market for the longer term:

(1) Net foreign purchases of canadian stocks and bonds is at record high
and
(2) Canada offers a current yield premium as compared to the US market.

Finally, our market in terms of sectors is and has always been a TRIANGLE with 3 sectors basically:

Financials is 29.1% of the market
Materials is 25.2%
and Energyis 23.0%

If you can manage the sectorial mix, you can out-perform this market.

Until next time

Pierre Brodeur

Starting again ...

2010-12-17T05:55:00.000-08:00

Once upon a time there was a Canadian Point and Figure blog which I cancelled because it was being "abused" by foreign spam individuals.

I have been identified as a Point and Figure trader but there is really a lot more about myself, I think. And so this blog will remove the constraint of updating Point and Figure analysis at least once a week and provide me with the tools to update my "timing research" whenever I want to.

So I am back in business on my own terms

Pierre Brodeur