Technically speaking: The recent weakness is simply an overdue correction

September 22, 2015

2 minute read

Technically speaking: The recent weakness is simply an overdue correction

by Ryan Lewenza, Private Client Strategist, Raymond James

Highlights

• While our belief is that the S&P/TSX Composite Index (S&P/TSX) will stage a late-year rally with seasonality turning bullish in October, the price action for the S&P/TSX remains negative, and as such, we maintain our near-term cautious view. For us to get more bullish on the Canadian equity markets we believe the S&P/TSX needs to break above the 13,800 to 14,000 range.

• Looking at the S&P 500 Index (S&P 500) from a longer-term perspective, we note that the S&P 500 has broken down from its long-term uptrend, and is trading below its 40-week MA. Clearly, S&P 500’s technical profile has deteriorated, which has us on high alert of a potential trend change. Our base case view remains that the recent weakness is simply an overdue correction rather than the start of a new bear market.

• Another important technical development following the steep August decline is the recently registered “sell signal” according to Dow Theory. Like our Chief Investment Strategist, Jeff Saut, we are giving the equity market the benefit of the doubt, believing the equity markets will re-accelerate, thus providing a false “sell signal”, similar to what was experienced in the flash crash of 2010. However, should the Dow Jones Industrials and Transports break below their August lows of 15,666.44 and 7,466.97, respectively, we will then change course, honoring the “sell signal” and likely adjust our technical view.

• The technical profile of gold has recently improved with the commodity experiencing a “higher low” and is trading above its 50-day MA. However, gold remains in a long-term downtrend, and below its declining 200-day MA. For us to get more bullish on gold we would need to see it trade above US$1,150/oz (short-term downtrend) and US$1,181/oz (200-day MA).

• We have been consistently bearish on the Canadian dollar for some time due to its weak technical profile and our cautious view of commodities. However, in the short term we see the potential for a countertrend rally. After a short-term bounce however, we expect the long-term downtrend to continue, and we see the potential for the CAD dollar to decline to low $0.70’s.

• The technical profile for the S&P/TSX Capped Telecommunications Index continues to improve, with the sector outperforming the broader Canadian market since May. Given the continued improvement in the sector we recommend investors add to or establish a position in Telus Corp. (T-T).

• The technical profile of the S&P/TSX Capped Energy Index remains negative with the sector below key MAs and in a relative downtrend. For us to get more constructive on the sector we need to see the sector break above 180 to 190 and break above its long-term relative downtrend.