Young and Frederick - ScotiaMcLeod Whitby

Finally … A Direction becomes clear!!

Over the last seven months the TSX has been holding in a range-trading pattern that extended from approx the 11,200 level up to the 11,700 mark. The index rose when commodity prices and economic concerns swung up and fell when oil prices, commodity prices and economic prospects dimmed.

From a technical analysis viewpoint this is fairly normal and healthy situation. It allows the market to consolidate and assess the direction of the next move after the big economic shock we received just one year ago.

For our clients, you know we have remained cautious urging patience and a capital preservation strategic direction until the economic danger passed. In the last three weeks we have seen the market signal that the danger has diminished.

Coming into April, which traditionally has been the month to usher in seasonal weakness the TSX, broke out and up. While some short-term caution is still required the intermediate term direction has become clearer.

The market is set to move higher. The long base build by the TSX since last September at the 11,700 level has now been broken, tested, and moved above. The 11,700 level should now provide significant support if the market weakens. The upside targets for the TSX call for a move toward the 12,600 to 13,000 points as being the next target levels.

If however the 11,700 level on the TSX is broken, strong intermediate support appears first at the 11,500 level, followed by 11,200, then 10,900. The 11,200 level and the 10,900 represent corrections of 8 and 10 percent respectively, which are not uncommon in ongoing intermediate term market advances. If those levels are seen, strong buying would be recommended as this would represent the completion of the second down leg of W shaped correction pattern. In our view this would represent a very low risk buying opportunity.

In the short term (i.e the next month) there are hurdles to overcome. Crude oil could be ready for a consolidation after the recent run up in price, and this could impact the TSX.  On the international front, fiscal problems in the so-called PIGS (Portugal, Ireland and Greece and Spain) threaten European economic unity, while earnings in the United States will begin to be reported in the next 2 weeks.  Should the earnings disappoint and expectations for the economic recovery begin to falter, the market could correct.  A portfolio strategy of placing stop loss orders at equity position support levels can help to mitigate the impact of any pullback and is worthy of a discussion.

BOTTOM LINE TSX Index: In Canada the bounce off the deeply oversold levels of one year ago is complete.  A more normalized and far less dangerous investing environment now exists and this represents a low risk entry point in the intermediate to long term.  That being said a short-term correction is possible.  If this should occur it should be viewed as a buying opportunity and cash positions can be  reduce with confidence.  

NOTE: For more detail and investment discussion related to the sub sectors of the TSX see the Private Client section of our web site located at www.onestrategy.ca or www.youngfrederickinvestments.ca.  Look in the Technical Analysis Center, then Sector Review. 

If you do not have a password please contact Jay in our office and he will provide you with one. 

Have a great month.

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