BullMarketRun - Hopeful Sign: 2010 CDNX Chart LookBullMarketRun - Hopeful Sign: 2010 CDNX Chart Looks Like Repeat Of 2004
July 16, 2010
It’s not hard to find some pundits right now who are predicting thesky is about to fall and markets are going to crash across the board –Clive Maund is one of many who are very bearish at the moment.
At BMR, we’re seeing things quite a bitdifferently. In fact, we’re expecting markets will be quite robustbeginning later this summer and continuing through the remainder of theyear.
The last 2-and-a-half months have not been pretty. The CDNXis off 17% since the beginning of May. The Nasdaq is down 11.5%, theDow has declined 8% and the TSX has fallen 5.2%.
As far as the CDNX is concerned, our contention isthat the weakness we’ve seen since early May is merely a correctionwithin an ongoing bull market. Rising 200 and 300-day moving averagessupport this view. If we were on the verge of a major crash in allmarkets, as witnessed in 2008, the CDNX would beleading the way on the downside in very serious fashion as it did inJuly and August of ’08. The CDNX has simply not brokendown from its primary trend and has proven to be a very reliableleading indicator of the direction of the major markets and even theeconomy.
Today’s action was very encouraging. Despite major weakness in Goldand commodites, and large declines in both New York and Toronto, the CDNXfell just 7 points to 1380. This shows resiliency and perhaps alsodemonstrates the CDNX decline since early May has nowlargely exhausted itself.
Historically, there is a very interesting and perhaps significantcomparison between the CDNX 2010 chart and the 2004market. We believe a repeat of 2004 is very possible which means now isthe time to be a buyer and embrace this current weakness in advance ofwhat could be a very strong move to the upside beginning in earnestwithin a month or two. John, BMR’s technical analyst,takes a detailed look at the similarities between 2004 and 2010 in hisvery astute analysis below the two charts we’ve posted.
In each year the 50 and 100-day SMA’s (simple moving averages) bothstarted to decline in the month of May. In late July of 2004, the CDNXbottomed at about 6% below its rising 300-day SMA. Its 100-day SMAreversed to the upside in late September and the market finished theyear above 1800 for a 26% move from the July bottom.
Moving ahead to where we’re at now, one cannot rule out thepossibility of one final plunge or shakeout in the CDNX,perhaps to about 1300, though it’s equally possible the recent low of1343 will hold. The main point to understand is that now is more thanlikely a good time to be accumulating quality junior resource stocks –ones with excellent projects, strong balance sheets and superiormanagement. Don’t forget also that Gold is approachinga seasonally strong period and could really begin to take off come latesummer/early fall. Given that U.S. mid-term elections are coming up,Obama and the Democrats can be expected to try everything they can togrease the wheels of the U.S. economy to maintain their control inCongress. China growth has slowed but is still robust. Corporateearnings are showing strength and that should help to underpin themarket.
Below, John examines the comparison between the CDNXin 2004 and the CDNX so far in 2010 – the similaritiesare incredible:
CDNX chart for 2004 (left) beside CDNXchart for 2010 (right):
John: The whole basis of technical analysis isthat chart patterns are repetitive. Time and time again we have seen ifthe required criteria are met, the patterns will produce the sameresults most of the time. Nothing works 100% of the time.
Today we are going to look at not only chart patterns but we aregoing to integrate them with seasonal effects with respect to the CDNXIndex. We are going to compare the CDNX chart for2004 with that of 2010 to perhaps get an insight into what we may expectfor the remainder of the year.
Now in order to get a meaningful comparison we have to eliminate thedaily and weekly trading “noise” and look at the charts in terms ofhorizontal and sloping trend channels.
First, let us compare the charts for the period January throughApril. We see that both charts have 2 horizontal channels at differentlevels with the Index peaks occuring in March for 2004 and April for2010.
Each one then has a downsloping channel (downtrend) from the latterpart of April to around the middle of May. Both charts then have theIndex in a horizontal channel from sometime in May to July at whichpoint the Index drops into a lower horizontal channel. That is where weare now.
Thus, we can see that the Index behavior this year is very similar tothat of 2004.
Looking at the indicators, we see that for both charts at this timethe RSI is low at 25%. The Slow Stochastics has bottomed out at anextremely low value and the Directional Movement Indicator shows the -DI(blue line) is very high – between 50 and 60 and this peak in 2004 wasthe Index’s low point for the year. We probably have seen the low forthis year, too.
The outlook for the CDNX for the remainder of thisyear is very bullish. I fully expect that within the July/mid-Augustperiod we will see the start of a bullish move to the upside in asimilar manner to that of 2004.
Source:
https://www.bullmarketrun.com/2010/07/16/hopeful-sign-2010-cdnx-chart-looks-like-repeat-of-2004/
Guy