Banking On These Canadian Sectors Gaining Energy

From the desk of Tom Bruni @BruniCharting

The TSX Composite is peaking its head out above resistance and into the fresh air of all-time highs, but can the recent strength continue?

Today we're looking for answers in two sectors that matter, Financials and Energy, which account for roughly 50% of the index's weighting.

First off, here's the TSX Composite Index breaking to new all-time highs, slightly exceeding its former highs of 16,650. Momentum has yet to get overbought, but if prices are above that level then we need to be erring on the long side with an upside objective of 18,300 over the next 6-12 months.

Click on chart to enlarge view.

Financials make up a third of the TSX Composite and look to be resolving from a 21-month base that began in January 2018. It's had several attempts at this, but this weekly close above its downtrend line is more decisive of a breakout than we've seen in the past.

Meanwhile, the TSX Capped Energy Index looks like some of the US Subsector ETFs like XOP in that it's confirmed a bullish momentum divergence on the weekly and daily charts and failed breakdown by closing back above 125.

While a lot of work has to be done structurally, these are the conditions that could lay the foundation for Energy to create a sustainable bottom. With this sector comprising 18% of the TSX Composite, prices stabilizing and working their way higher over time would shift this from a major headwind to a tailwind for Canadian equities.

Our bullish intermediate-term thesis for Canadian equities, and equities as an asset class remains intact and so far the trades we outlined in August have been working well. To continue taking advantage of this thesis, there are new stocks on our radar with a more attractive reward/risk today.

In the meantime, keep an eye on the big boys that drive these sectors for further clues about whether their recent moves can continue. These include Royal Bank of Canada and Toronto Dominion (40% of Financials), and Canadian Natural Resources and Suncor Energy (50% of Energy).