Oh Canada! Technical Strength Continues up North
The S&P Toronto Stock Exchange 60 index (SPTSE) carries a 45% weighting in energy and materials which, like the NASDAQ and technology, makes it a good proxy for natural resource sectors of the market. With oil's continued strength and the gold's lively bounce from its recent low near $550, it is no wonder this index has regained some traction over the last few weeks. Reviewing its recent history, it peaked in May at 700, (surpassing its August 2000 high) then suffered a 10% decline in the next month. In sympathy with the correction in US materials sectors and Emerging markets (also heavily weighted in basic resources), this downdraft came in the midst of strong year-to-date performance in the basic resource sectors.
Technically, the TSE 60's recent chart strength reflects the action in crude and precious metals, with consolidation showing in the middle of its trading band on a Point and Figure basis. In the chart below, a powerful spread triple-top breakout can be seen at the 675 level:
Under this form of technical analysis, strong charts in definitive up trends tend to see their corrections limited to action around these points rather than becoming dramatically oversold. In the case of the TSE 60 the midway pointing its own expected trading band is now in the 640 area, suggesting that risk in this index is still minimal despite its recent return to strength.
The last 2 years have witnessed Canadian market rallies in the late summer and early fall. In the past, I have also noted the close correlation between the energy market pricing of oil and gas with respect to the hurricane season, and energy's typical signs of strength as Summer ages. So, as the Middle East risk premium could well be replaced (or compounded, depending on how events unfold over there) with the hurricane premium in the coming months, there remain no convincing signs the powerful move in energy and materials has ended just yet.
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