Should we fear a rising wedge on the TSX?

I’m not a big fan of the TSX 300 Composite Index. It’s a capitalization-weighted index, which essentially means that whatever is hot will be the overweight stock or sector in the index. You may recall Nortel’s weighting of about 1/3^rd of the index back in the late ‘90’s. Brilliant. Currently, this index tends to maintain a fairly steady concentration in just three sectors. Right now, the composite is about 22% in financials, 23% in mining and 18% in energy  (oil & gas). You can see how the movements of these three sectors can bias the direction of the index – which doesn’t necessarily present a fair picture of how many of the other sectors are performing in our home and native stock market. Charting the TSX 300 does not necessarily add valuable insight from a market macro view to those of us who are underweight – or even neutrally weighted – in the “big three” overweight sectors. I view the technical formations on the TSX 300 Composite as less “telling” about the overall direction for Canadian stocks on a broad-sector basis – so beware of this index’s bias before reaching any conclusions regarding your non “big three” sector  holdings.

Having ranted about my distaste for charting the TSX (so glad to have gotten that off my chest!) , I’ll now cover a few observations on this index.  The chart above illustrates what may be a breakdown from a “rising wedge” formation. Rising wedge formations are thought to be bearish within Technical analysis circles. From a practical point of view, I am not so sure they are a reliable bearish formation, except in the influence of the formation upon Technically-driven traders (self-fulfilling prophesy). Even if you are dubious as to the predictive accuracy of rising wedges, you may still want to consider the seasonal tendencies for the index in conjunction with this formation. Equity clock (www.equityclock.com) has a wonderful resource of charts with their seasonal patterns. Everything from the broad composite indices, to sectors, commodities and even many of the popular individual stocks on both CDN and US exchanges are charted for seasonal patterns.

Below is the seasonal chart for the TSX composite. You’ll note that the pattern is pretty flat for the summer months on this index – similar to the pattern for the S&P500.

The near termed (daily) chart suggests a meandering pattern, with lots of technical resistance coming in between 15,500 and 16,500. While cumulative moneyflow (bottom pane Accum/Dist line) remains bullish, momentum oscillators remain non-committed. Strength vs. the S&P500 is bearish to neutral. Overall, the technical patterns I am viewing suggest that the seasonal patterns will likely come into play this summer. I’ll cover more details on those indicators in the video below.  It looks to be an uninspiring picture for the TSX 300 in the coming weeks or months.

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