Finding Diamonds In The Rough - The Four C's - Clarity, Canada, China, Commodities


It has been a very interesting week for Canada, China, Commodities and job cuts. Friday morning had the non-farm payrolls number come in about 1/2 of what was expected by economists which was well below estimates for the first time in a while. Now we have reached some critical points on the relative strength charts that are pointing to better 'off shore' results for investors. This payroll data might be a clue to why this is happening. These hints have been showing up for a while now in the Shanghai market along with Australia, Japan and Europe. But if you're a Canadian, we appear to have a rose budding amongst the thorns for the first time since last fall. Must be the return of spring.

Chart 1 is a surprise for me. In Chart 1, you can see Canada ($TSX) has broken a long trend line in terms of relative performance compared to the S&P 500 ($SPX). The ratio of Canada compared to the USA ($TSX:$SPX) is shown in purple. It is early days but we can see this is the highest level of outperformance in the last 6 weeks. So although the Canadian market hasn't really broken out to new highs, it has recently performed better than the US Large Cap companies. 

Chart 1

The second example is the Hong Kong Hang Seng market ($HSI). The jagged repetition of these bugaboo-spire peaks makes it hard to create a tight trend line to the action. However, the late January peak broke the big down trend, pulled back and has now broken back above. The horizontal resistance marked in blue is an important level as that would be six month highs in relative performance. Lastly, the price action on the Hang Seng index has had a series of rising lows but an upside resistance around 25100. We can see the price action broke to six month highs and needs another good week to get to a new 52 week high and 7 year highs.

Chart 2

Chart 3 is at the same as Chart 2 but I have shown the twenty year view of the Hang Seng ($HSI). The chart will need a little discussion for investors new to supply/demand and relative strength. We can see on the price chart, that the Hang Seng ($HSI) looks to be breaking out of a very long base. To quote Louise Yamada, "The longer the base, the higher the space", so this could not look more bullish. We can see a massive 4 year trend in underperformance shown in purple on the ratio ($HSI:$SPX). This simply compares the $HSI to the $SPX each period (week) and the $HSI has dramatically under performed. You may remember that the US market has been accelerating to the top corner of the chart for the last 4 years. That little purple spike in the very bottom right hand corner of the ratio ($HSI:$SPX) could become very powerful. When we are breaking out to new highs and breaking out of an existing trend in terms of relative performance, I would expect to see major money flows towards this market as it breaks out of the 7 year base.

Chart 3

Notice the powerful move in relative performance and price off the 1998 lows at point 1. At Point 2, we started to make higher highs in relative performance and we can see the $HSI really accelerate as investors moved into the Asian stocks. At Point 3, the Hang Seng made lower highs in performance compared to the price from the 2009 peak which we call divergence. From there on, the Hong Kong market struggled in price and continuously under performed. Until this week! Pick your view, but I think a breakout in Hong Kong, China could also cause a push up in Canada. It might not be time yet, but you could definitely tilt an eye towards these markets to strategize when an entry setup appears that works for you. Martin Pring mentioned emerging markets the other day. All of this points into commodities, which typically lag a new economic surge and I discussed some of the base commodities on my webinar April 2, 2015. You can find a link to that article here. Greg Schnell Market Roundup Live. If you are new to StockCharts or very experienced, I will be posting some articles in April about how I use the StockCharts home page to find opportunities. They will be on The Canadian Technician blog which is free to everyone. You might find those blogs very helpful as a tuneup or an introduction. We keep adding to the site and sometimes great new tools go unnoticed.

Good trading,
Greg Schnell, CMT

Greg Schnell
About the author: , CMT, is a Senior Technical Analyst at specializing in intermarket and commodities analysis. He is also the co-author of Stock Charts For Dummies (Wiley, 2018). Based in Calgary, Greg is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is an active member of both the CMT Association and the International Federation of Technical Analysts (IFTA). Learn More
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