TSX Outlook

The TSX has shown signs of life this year. That’s because oil, despite its pullback over the past couple of weeks from $65-ish into the high $50’s, has rallied from its $45 low in December. As well, we’ve seen a bit of strength in defensive stocks like utilities telecoms and REIT’s this year. Normally, one does see a bit of a movement into defensive stocks over the summer. But it’s a bit unusual to see the move over the stronger winter months. The same thing happened over the winter to the defensive sectors on US markets. That may not be a great sign. We like to see a market moving into growth, and not moving into risk-off trades. But of late we have seen a pickup in the  growth stocks again. Witness the move on the NASDAQ lately.

Below is a chart of the TSX composite. You’ll note that I have drawn the expanding pattern trend lines on the chart – as seen on this blog. As I noted on that blog – this pattern is typically seen as a forewarning of a pullback.

You’ll also note the three momentum studies (stochastics, RSI, MACD) have hooked down from overbought conditions in late April.

Note that prior to the December meltdown, these momentum studies (particularly RSI and MACD) diverged against the new highs on the market in August 2018. We can’t tell if that is going to happen again. But it does appear that these momentum studies are struggling to reach the highs they hit in April – even as the TSX takes another run at those highs.  It must be noted that momentum studies always lag price a bit– so it’s expected that they won’t be perfectly be in sync. But you do want to see those indicators get up there if the market keeps moving up. Keep an eye on this development- as the divergence of last fall gave us a strong warning of the bearish move in December.

Conclusion

For now, the TSX is looking neutral. No urgency to buy or sell more enthusiastically than normal into this market. However, there are a few warning flags – such as waning momentum, and that nasty expanding pattern- that might cause us to keep an eye open for change.

Keith on Bloomberg/BNN MarketCall next Tuesday July 16th at 6:00pm

Keith appears regularly on BNN Bloomberg MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management.

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