Tuesday, September 13, 2011

The TSX 60 walks a thin line

The TSX 60 index is walking a thin line after breaking a key trend line on the daily chart. This represents a significant breakdown and could foretell of more downside in the near future.

This trend line has acted as support since a bottom was formed by the lows of August 8th. This means that whatever strength was there to lift it after it fell steeply in late July and early August is gone. It also means that the bear wedge formed by the fall and subsequent sharp bounce has triggered.

Going forward, there are two scenarios that can play out that will lead to more downside--assuming we don't fall more tomorrow. The first sees us trade up into the 20 moving average, 780 gap fill resistance area and then pulling back. The second involves trading sideways for several days and then ultimately breaking down. In the event of further downside, it is very likely that the TSX goes at least to the pivot low at 732 and probably much lower.

In the meantime, I'm favouring sideways to upside trading. After a major breakdown such as this it's typical for the market to retrace back to the initial breakdown area before falling further. I'm also biased towards short term upside on the TSX because of the major trend line recapture that happened on Monday on the S&P 500 in the US. 

SPX trend line recapture

In any case, just remember that the market is weak right now and any bounces should be quick and can be used as shorting opportunities. Bearishness on the TSX 60 will be negated if it can recapture the 20 and 50 daily moving averages.

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