My first analysis of the S&P/TSX 60 Index

Seeing that I will be trading (not investing) the Canadian market in my RRSP, I am starting to follow the S&P/TSX 60 Index. I will adapt a method that I have been using for the S&P 500. Namely technical analysis (price), internal sentiments (depth), and intermarket analysis (breath). Nothing fancy, really. I will discuss my method and analysis in this post. The goal is not to find a holy grail trading method, but to get a feel of the ebbs and flows of the market. Let's review the TSX from three angles. First is a standard price chart. As I was saying in the beginning of the month, my long term view of the TSX is still bearish. The one and only condition to invalidate my bearish outlook is that the TSX stay clear of the 12,000 resistance price level on the weekly chart. As you can see in Figure 1 below, that hasn't happened yet despite a continuing intermediate term (in weeks) bullishness. On the other hand, the intermediate term up move in the market is undeniable. The market has been making higher highs and higher lows for months now. So the fight continues as we wait to see which side will win. The 12,000 resistance or the relentless rally.

[caption id="" align="aligncenter" width="570" caption="TSX 60 weekly"][][][/caption]

Figure 2 shows a reason for my bearishness. As the price of TSX 60 moves up in the past few months, the percentage of companies on the TSX Composite (representing over 70% market capitalization on the Toronto Stock Exchange) that are over their 200 day moving average has been forming a toppy pattern (top of Figure 2). Similarly, the 50 day moving average percentage confirms this price divergence from a shorter term perspective.

[caption id="" align="aligncenter" width="570" caption="TSX internal sentiment"][]1[/caption] Lastly, I consider the dynamics between the financial and energy sectors, two of the biggest components on the TSX. Here is why I picked those two sectors.

Seeing that the financial sector is the bane of global economy in recent months, price moves in this sector represent public risk appetite. Conversely, the energy sector is the foundation of the Canadian economy. As such, I use it as a crude measure of risk aversion. So a ratio between the TSX financial index versus the TSX energy index is my way of estimating risk appetite versus risk aversion. I call this ratio my risk meter. Basically, a high value is good and a low value is bad.

Figure 3 shows that the up trend in recent months is actually confirmed by an increasing risk meter. So as much as I've been ringing the bear bell, this rally is legitimate so far. As such, the market is decidedly bullish in the intermediate term (as if anyone doesn't know by now).

[caption id="" align="aligncenter" width="570" caption="TSX Financial vs. Energy"][]2[/caption]

In summary, my long term view is bearish but my intermediate term view is bullish. Even though a month has passed since my last peak of the TSX, things remain the same. The line in the sand at 12,000 is still being fought for.

I will not short or long the market until a clearer scenario presents itself.

Posted 27 March 2010 in stocks.