The TSX has been showing some life lately, especially after cracking its 2-year ceiling of around 13,000 in early October. However, some evidence suggests that this index is due for a pause, or correction sooner rather than later.
First, take a look at the daily TSX300 chart shown above. The month of November saw a short termed rising channel for this index. Meanwhile, divergence in the momentum indicators I like to watch (stochastics, RSI, MACD) suggest that change may be pending.
Just as importantly, money flow, as evidenced by the Accumulation/Distribution line at the bottom of the chart, was also moving steadily lower through the month. This suggests that buying volume was generally not as robust as one might like to see in a rising market–money may be starting to vacate the TSX at this time.
Finally, take a look at the breadth chart below. You can see that the % of stocks on the TSX that are above their 50 day MA’s and their 200 day MA’s is declining. On the left side of the chart you can see where I’ve highlighted the January to April period of this year – where the same thing occurred. If you’ll go back to the top chart of the TSX 300 composite index, you will note that after that period of breadth divergence, the TSX entered into a very volatile April – August period. Returns over that period were flat, with two separate 1000 point swings – one in April, one in June making that flat return a harrowing ride.
The TSX has been riding the good fortune of its Canadian banks lately. However, with earnings season for this sector behind it, the banks tend to enter into their period of seasonal weakness around now. I have mentioned on this blog, and on my BNN appearances a few times recently that my outlook for the US banks is to outperform the Canadian banks in the coming months. With bearish charts on oil, gold, copper and other commodities, the TSX index may struggle to move higher for a while if the banks do not continue their roll. For this reason, I continue to endorse very selective stock picking within the Canadian markets, with some emphasis on small to mid-capped stocks and unique value situations.
Orangeville Library book tour seminar: Date has been changed from December 3rd 2013 to February 4th 2014 at 7:00pm
BNN MarketCall: I will be on MarketCall Tonight on Wednesday Dec. 18th at 6:00pm
Excellent blog post (like always).
In addition to your analysis, $CDNX (TSX Venture Exchange – Vancouver) is losing key weekly level of 923. If this level is lost at the end of this week, CDNX index will be in downtrend (on weekly). Usually, small caps lead the way, so we could expect TSX index to follow CDNX.
Thanks Shawn–good point about the venture exch.
Awhile back you mentioned that PPL is now a holding and probably long term. Today I see divergence on full stochastics, MACD and RSI. The equity appears in an ascending triangle that is generally bullish during a bull market. What is your reaction when viewing this situation: divergence, a bullish pattern, bullish market, and view to a long term hold. Would you normally hold, buy more or sell. Thanks for the opportunity to learn from the best.
I use momentum and other studies simply as a way to time my buys (or sells)–what matters to me most are the “Phase” of the market (read my book Sideways for more info on that subject)–essentially, the trend or pattern is what matters, and the other stuff finesses your entry or exit.
I am long term bullish on PPL–we hold a position in our portfolio–buy on dips if you agree.