Ryan Lewenza: Watch the Signals at the 200-day Level Crossing
Technically Speaking – March 16, 2016
by Ryan Lewenza, CFA, CMT, Private Client Strategist, Raymond James
• In last month’s publication, we cited the potential for a rally in the S&P 500 Index (S&P 500). Since that short-term call, the S&P 500 has rallied 116 points, or roughly 6%. In the near term, we note that the S&P 500 is overbought with 90% of S&P 500 stocks trading above their 50-day moving averages (MAs) and is trading at its 200-day MA. As such, we see the potential for some near-term profit taking.
• The S&P/TSX Composite Index (S&P/TSX) has broken out from its year-long downtrend. In the short term, like the S&P 500, the S&P/TSX is technically overbought and is trading at the important 200-day MA. Therefore, we see the potential for some backing and filling to work off the overbought condition.
• With the recent strength in oil prices, the Canadian dollar (CAD) has rallied sharply off its January lows and has marginally broken above its downtrend since July 2014. We have been bearish on the CAD for some time, so the recent strength has us on alert for a potential change in trend. If the CAD were to break above its 200-day MA, currently at $.7539/US, this would likely cause us to re-evaluate our bearish stance.
• Commodities have had a good run, with the CRB Commodity Index up 11% over the last month. The index is now approaching its long-term downtrend around the 175 level. With the CRB Index technically overbought, and at its important long-term downtrend, we expect a short-term pullback in commodities.
• With energy representing roughly 40% of the CRB Commodity Index, it’s no surprise that WTI is also approaching its long-term downtrend. For us to turn more bullish on WTI we would need to see WTI break above its downtrend (US$39/bbl) and its 200-day MA (US$43.25/bbl).
• Following gold’s technical breakout, it had become technically overbought with an RSI reading above 70. It is now pulling back to help work off the overbought condition. We have become more constructive on gold given the breakout, and would recommend increasing exposure on any short-term weakness.
• Since we upgraded the S&P/TSX Telecom sector in December, it is up over 8%, being led by BCE Inc. (BCE-T) which is up 9.4% YTD. The sector continues to trade in a solid upward channel, is above its 50- and 200-day MAs, and is showing good relative strength. In the short term, the sector is due for a pause, but given the strong technical trend, we would use any weakness to increase exposure.
• Like commodities, the S&P/TSX Capped Materials Index is trading at its long-term downtrend, around the 205 level. We have been bearish on the materials sector for some time, but will need to re-evaluate this thesis if the index breaks above the key 205 level.
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