Canadian Chartbook Review

JC Parets
October 14, 2018

From the desk of Tom Bruni @BruniCharting

A major part of the thesis for higher prices in Canada was the breakout in Financials (and REITS) which represent roughly a third of the TSX Composite, however, over the last few weeks we've seen failed breakouts in many of these leading stocks.

In this post I'll highlight some charts identified during my Chartbook update that describe the type of environment we're in for Canadian stocks and why a more neutral stance appears appropriate. Given the correlation between equity markets around the world, I'd also encourage you to read some of our other free pieces about the US here, here, here, and here.

First let's start off with the TSX Capped Composite from a structural perspective. The weekly chart shows we still have a series of higher highs and higher lowers, however, the failed breakout above the January highs and bearish momentum divergence has pushed us below 18,170 and back into this 2017-2018 range. While this chart doesn't suggest a crash is imminent, none of these conditions suggest being long this market at current levels. We're in a bit of no-man's land here, so neutral is best.

Click on chart to enlarge view.

Here's the daily chart showing prices approaching the lower end of their recent range as momentum gets oversold and the 200-day moving average begins to slowly roll over.

One of the biggest reasons for the recent weakness is the selling pressure in Financials, which account for roughly a third of the index weighting. Prices have been stuck in a range for most of the year, but appear to be resolving this triangle pattern to the downside. This combined with momentum failing to get anywhere near overbought territory on its recent rally attempt suggest the bias is neutral at best, and bearish at worst.

Here's another look at the sector, but on an equal-weight basis versus the equal-weight TSX Composite. The ratio attempted to make new highs in September, but hit a brick wall at the January highs and sharply sold off, sending momentum into oversold territory. While the 200-day moving average is still rising and prices remain in the middle of its year-to-date range, it's unlikely we see a sustainable move higher in the broader market if this ratio isn't stabilizing or moving higher.

One component of the Bank Index is Manulife Financial Corp., which confirmed a multi-year head and shoulders topping pattern two weeks ago and has been falling since. It has a long way to go. towards its 2016 lows.

Another name that's rolling over is Sun Life Financial, which failed to get above the 2007-2008 highs and is now breaking its uptrend line from 2013.

A smaller aspect of the bull case was the strength in REITs, which turned out to be a failed breakout as well. Momentum didn't get overbought as prices made new highs, so that combined with a flat 200-week moving average suggest more range-bound action is likely.

Industrials, which account for roughly 10% of the TSX Composite, were flagging tightly below our price target of 271.50 but are now resolving to the downside and confirming the bearish momentum divergence that formed over the last few months. While this remains a structural uptrend, there's no reason to be long if prices are below the year-to-date highs.

Within Industrials, Railroads have been on fire in both the US and Canada, however, leaders like Canadian National Railway are now putting in failed breakouts and confirming its waning momentum.

Energy is another large component of the TSX Composite, representing roughly 19% of the index. Prices remain stuck in this symmetrical triangle, but with momentum in a bearish range and the 200-week moving average downward sloping, a downside resolution is looking like the higher probability outcome.

One reason for the continued weakness in Energy is the failed breakout in one of the sector's largest components and leaders, Suncor Energy. Like we've seen in Financials and Industrials, momentum had been diverging and now prices are confirming that divergence by breaking back below former resistance into their long-term range.

The only sector we track whose daily chart has prices above a rising 200-day moving average and momentum in a bullish range is Healthcare. And as nice as this chart is, Healthcare is only 2% of the index, which may as well be a rounding error in terms of impact. A market cannot move higher with the majority of its sectors in down or sideways trends. It's just math.

The Bottom Line: Failed breakouts in leaders and new lows in laggards are not characteristics of an uptrend. Until we start to see prices stabilize and build bases, a neutral/bearish approach appears best given the number of indexes and sectors hitting oversold conditions and trading below flat or falling 200-day moving averages. If we start to see relative strength pick up in Financials, Energy, Industrials and/or Materials that would be constructive, but for now these heavy hitters struggle to pull their weight.

Premium Members can find all of our updated charts in the Canadian Market and Sector Indexes and TSX 60 Chartbooks.

Thanks for reading and let us know your thoughts!

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Allstarcharts Team

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