Thursday, June 18, 2009

Banks and Crude Charts Look Hot, But Housing Still a Drag

By Alex Roslin

Investor's Digest of Canada

June 5, 2009

Markets have been on fire since their March lows, but they’ve climbed a classic “wall of worry.” Bearish sentiment is so strong that many investors and analysts are convinced the rally can’t last and we are about to see a monster selloff—perhaps taking markets below the March lows.

Even the “smart money” large commercial hedgers are highly pessimistic. Starting in late March, they’ve built up huge net short positions in S&P 500 futures and options—a sizeable bet that the market would fall.

As of mid-May, all this worry has been terribly misplaced. Stocks have shot virtually straight up for two months. The S&P/TSX composite index and S&P 500 both gained 35 percent since early March, while the TSX capped financial services index flew up an extraordinary 59 percent.

The phenomenal gains are clearly bullish, but how can we tell if the rally has legs? Could this merely be a massive “sucker rally” that traps unsuspecting investors just as they tiptoe back into the markets?

An important exercize worth doing regularly is to step back and look at the longer-term weekly and monthly charts to put things in proper perspective—and see where we might be headed. These charts are telling us some interesting things.

Many market sectors have gone a long way toward repairing the damage they suffered during the Crash of ’08—but some haven’t and remain highly dysfunctional. Especially well-positioned right now are Canadian financials and crude oil; but housing remains a worrisome underperformer.

The charts also show that many sectors are headed into potentially dangerous territory. We might see a sideways consolidation period at best—or, at worst, the long-expected selloff. Below are some highlights based on my interpretation of a chart-reading system developed by renowned analyst Tom DeMark. (Google “Tom DeMark” to learn more.)

Broader market

The S&P/TSX composite index has been a big winner lately, benefiting from its commodities focus. Its rally since March has powered the index up handsomely, but now, the index has stalled below a key level of resistance at 10,312 on the weekly chart. This is where there’s a Tom DeMark Setup Trend (TDST) resistance line dating back to the beginning of an uptrend that started in 2005.

Also a concern: the TSX completed what DeMark calls a Sequential Setup without breaking out above the 10,312 level. (A Sequential Setup is nine consecutive days of closes higher than the close four days before.)

Under DeMark’s theory, this suggests a rally that has possibly exhausted itself. A rally that doesn’t break out above a TDST line before completing a full Sequential Setup has a good risk of facing strong headwinds.

The plus side is that, in the event of a selloff, the TSX has solid support at 9887 (the highs of early Nov. 2008) and 9267 (the highs of early Jan. 2009) on the daily charts. These levels could contain any correction that does take place. A stop could be placed below these levels.

The most bullish development would be for the TSX to shrug off these factors and keep muscling upward above 10,312. That could spell lots of additional upside. Watch this line carefully.

The TSX can be traded with exchange-traded funds like the iShares S&P/TSX 60 Index Fund (XIU) and the 200-percent leveraged Horizons BetaPro 60 Bull Plus Fund (HXU). A bearish bet can be placed with the 200-percent leveraged Horizons BetaPro 60 Bear Plus Fund (HXD).

Within the TSX, Canadian banks have been some of the most remarkable performers. The S&P/TSX capped financial services index has broken up beautifully above resistance on both the weekly and monthly charts (around 141 and 137, respectively). These areas should provide solid support in the event of a broader market selloff and can act as stop levels. Next resistance is still far above current prices. A TDST resistance line appears on the monthly chart at 185—which means potential room for nearly 30 percent more upside.

Less happy is the action in housing. Despite spectacular rallies since March, Canada’s iShares Canadian S&P/TSX Capped REIT Index Fund (XRE) and the U.S. HGX Housing Index have both stalled in their uptrends before coming anywhere close to resistance on the weekly and monthly charts. Since housing is at the root of our current mess, this sector’s weak charts probably spell trouble for the market rally.


Crude oil saw a vicious correction last year but might now be among the best positioned commodities. In mid-May, it rose up smartly above resistance on the weekly and monthly charts around $57. The caveat is that lots of additional resistance exists on the weekly chart that could trip up crude. Be ready for lots of volatility. Next weekly resistance levels to watch are $62.43 and $73.48. Crude is tradable with the 200-percent leveraged Horizons BetaPro Crude Oil Bull Plus Fund (HOU) or the United States Oil Fund (USO).

Copper has soared 65 percent since March, but, much like the TSX, it has bumped up against resistance on the weekly chart. This comes just as copper has finished a full DeMark Sequential Setup. Support on the daily chart exists at 196, so this would be a logical support and stop level in the event of a selloff. A sustained rise above weekly resistance at 220 would be supremely bullish for the metal—and the entire market, as copper is a bellwether for the economy. (Copper can be traded with the iPath Dow Jones-AIG Copper Total Return Sub-Index ETN, symbol JJC.)

Emerging markets

Emerging markets are blasting off. The iShares MSCI Emerging Markets Fund (EEM) has exploded up through resistance lines on the weekly and monthly charts (at 30 and 29.50, respectively). Those levels should serve as support (and potential stop levels) for any selloff. And despite a 55-percent rally since March, EEM has its next serious level of long-term resistance at around $49—meaning nearly 60 percent of potential upside above the current price. Emerging markets are tradable with the 200-percent leveraged Horizons BetaPro MSCI Emerging Markets Bull Plus Fund (HJU).