Sunday, June 26, 2011

Holding a Middle Ground

The TSX60 index is holding a middle ground--for now. It's been chopping around at the lower levels of the daily chart since early June with few indications of going higher. Each break above the key 830 price level has been met with heavy selling. This is a bearish sign for the market to be sure.

We've seen continuous, and at times ferocious, selling since late May and the economic outlooks of several of the primary news outlets (CBC, CNBC) have become bearish. As a contrarian trader, I believe that when the market looks the weakest it's usually an opportunity for a bounce. For this reason I will maintain an upside bias for the short term and continue to do so until we trade and confirm below 810.

I see several possible scenarios playing out this week. Ideally, I'd like to see the market trade up into 838, 845 or 855 levels before trading back down. This would be consistent with the bearish wedge pattern we already have forming on the daily chart as well as provide a good shorting opportunity. A bear wedge is a sharp move down followed by a period of sideways to upside trading. However, we've already bounced from the low of 811 and may have technically satisfied the requirements for the wedge to play out. I don't think this will be the case as the upcoming Independence/Canada Day holidays are approaching and light holiday trading volume usually favours the upside.

In the event of upside trading, I will be looking to short the TSX60 index, as well as individual stocks (pattern permitting), on a hit or break of any of the levels I've listed above. I always prefer to short the highest levels, however the 845 level will be good resistance as well as it's the confluence of a 50% Fibonacci retrace, the 200 moving average and a previous pivot low. 838 is also good resistance, but the spike on June 22 nearly hit this level and so I feel less confident shorting there on a retrace.

Alternatively, if the market trades lower Monday, I'll be looking to buy key levels. The 800 to 785 range will be very good support as this corresponds with several key pivots and moving averages on the daily and weekly charts. I believe that these levels will be hit eventually, the question is do we go there this week or following the holiday period. In my opinion, a downward move this week is unlikely.

Please refer to the charts below and feel free to ask questions you may have. Also, be sure to follow me on twitter for my latest thoughts on the market.

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