The Canadian market has been slowly underperforming the US markets over the last two weeks. Friday had a nice surge in Technology, Financials, Oils, and metal miners as the chart for the TSX 60 broke above the 200-day moving average. Notice the change in the purple area of the chart. You should always be cautious any time the $TSX starts to underperform.
Technology continues to lead with Shopify (SHOP.TO) making fresh new highs. For the technology sector, the Relative Strength (RS), shown in purple, is testing the previous highs. Relative strength compares the movement of the stock price to a separate benchmark. When it is trending up, the stock is outperforming that benchmark. When it is trending down, the stock is underperforming the benchmark. For standardization purposes, the purple shaded area always compares to the S&P 500 on my charts.
The 40-day run we have had into this $86 level is now testing the prior highs. While that is great news, it marks an area of resistance. One concern I have is that a ballistic move like this reminds me of a last gasp rally in a commodity market. While technology stocks can really run, testing RS highs and price highs after a 40-day run suggests a need to pay closer attention. As long as they continue to outperform, stay with them. Stocks like the Descartes Systems Group (not shown) have gone on sustained 5-month runs (2018) with only a few small pullbacks along the way.
Without looking at a weekly chart, let's discuss momentum. When weekly momentum is strong, the Percentage Price Oscillator (PPO), which displays momentum, will be above zero. This occurs because price makes strong enough moves to keep the PPO momentum oscillator rolling above zero, with valleys and peaks above zero showing that the chart strength is excellent. From my work, when the PPO momentum indicator goes below zero for the first time on a weekly chart, the next rally has the potential to be a market top for the chart. This top may be lower than, equal to or higher than the previous peak, and suggests that the strong momentum the chart had is waning. The chart may continue on and start another strong run, but typically PPO tests around the zero level are a signal to pay attention to how the chart behaves on the rally out of the lows.
Here is the weekly chart for the Canadian Technology sector. This chart is signalling another reason to be careful. In 10 years, we have seen two dips below zero on the chart. In those cases, the next high was a significant high that lasted for at least another six months. Both examples were also straight surges higher, similar to what we see now. Again, the length and height may vary, but don't let market euphoria trap you in a sector if it is rolling over. Protect a position to ensure you profits are locked in.
Energy kicked it up this week with a bullish engulfing bar taking out the lows and highs of the last six weeks. Canadian Crude prices moved up 10% on a week-to-week basis. The Canadian Energy sector may also start to price in the outcomes of the Alberta elections, which are scheduled to take place before May 31. The chart below clearly shows a long time frame double bottom with the 2016 lows.
One concern chartists will have is that we do not have any positive divergence with the momentum indicator making higher lows while price is making a lower low. In 2015 and 2016, the PPO momentum oscillator made higher lows while price made lower lows. This positive divergence was one reason to expect price to bottom.
For that reason, this rally looks strong, but also needs stops to help capture gains in case it rolls over. Even so, we could have a nice multi-month run that moves the stocks significantly higher in a short period of time. Four of the last five years have had tops near April.
Moving onto the Canadian Financial sector, the chart continues to make lower lows on the momentum shown on the PPO. I am not convinced that we have reached the final low. We have the big six banks reporting between February 22nd and the 28th. RY.TO, TD.TO and NA.TO are close to making new highs and it is not uncommon for the banks to enjoy a strong rally into the end of RRSP season (March 1, 2019). Those charts look better than BMO.TO, CM.TO and BNS.TO. If energy stocks rally, it could help lift CWB.TO.
Lots of mental expenditure going on with the precious metal miners chart. The chart broke out above the down trend line (shown in red) and then stalled there for three weeks. To consolidate is normal, so we don't want to be bearish. But it is very important that it does not roll over here. The real issue is that volume never came with the breakout. A break above the black line and the volume-by-price bar (shaded in on the left side) would be a nice place to get on board. Some of the silver names started to surge on Friday, so perhaps the move is about to get going. The SCTR ranking pulling back and then returning above the 75 zone is a very bullish trait, while the Full Stochastics returning above 80 complements the chart nicely. Notice that these indicators could not reach that point at all in the last two years. This is definitely a week to be paying attention.
If I have one concern for the gold miners, it is the PPO. Looking left on this gold miners index chart, we can see how the PPO goes positive and rolls over again and again. Stay alert to changing road conditions on this one - be ready to avoid another ditch.
The real estate sector is testing prior highs. The chart looks fine, but stay alert for changing momentum as we test the highs over the next few weeks. We tested higher than the previous high but couldn't hold it into Friday's close. Not necessarily bearish, but it does indicate some resistance as sellers take profits.
Lots to cover today. In the latest Canadian Technician video, I show some of the strongest stocks in the Canadian Oil and Gas exploration industry. You can watch below or at this link!
Wednesday's Market Buzz was a must-watch edition discussing prominent stocks in the software industry that you've never heard of. You can find the new Wednesday Edition of Market Buzz on the StockCharts TV YouTube channel.
Friday's installment covered trading oil stocks as compared to software stocks and how to approach them differently.
If you would like to learn more about the basics of charting, check out Stock Charts for Dummies. The first section of the book walks through all the chart settings you need to help you get the charts you want, the second section explores why you might use charts for investing and the third section is about putting it all together.
If you are missing intermarket signals in the market, follow me on Twitter and check out my Vimeo Channel. Bookmark it for easy access!
Greg Schnell, CMT, MFTA
Senior Technical Analyst, StockCharts.com
Author, Stock Charts for Dummies
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