Travelling Technicals with Global Indices: S&P/TSX Composite Index

Welcome back to another edition of Travelling Technicals where every week I dissect some of the most well known indices from around the globe and attempt to unravel what the future could hold for these markets and what is to be expected in the weeks and months to come. Today our focus will be the TSX Composite Index which is a basket representing 240 of the largest listed companies in Canada listed on the Toronto Stock Exchange.

The close relationship between neighbours Canada and the United States of America has always come down to the fact that the former is in abundance of resources and the latter requires surplus to demand , its as simple as that. Canada's economy has grown largely due to its strong ties with its American counterparts and as a result of such, has elevated its stature amongst some of the world's largest economies with it currently sitting as the 11th biggest and its worth to mention not too far behind Russia.

But I was interested in the geographical location of this country taking into consideration that China has shift up the demand for resources however with the slow down you would think they would be one of the many casualties, but as things stand the world's focus has turned to their neighbours as the driving force behind world economic growth in years to come. This would suggest that perhaps they may be much better off than their distant commodity driven competitors.

Coming back to the composition of the index, Financials make up the largest component of the stocks in the baskets representing a staggering 38.3% which isn't surprising given the fact that their economy is largely influence by the US. Furthermore Energy and Materials combined make up 28% showing the prominence of resources in their economy especially exporting gas and liquids to the US.

The Top 10 Largest companies are;

1. Royal Bank of Canada 
2. Toronto-Dominion Bank 
3. Bank of Nova-Scotia Halifax 
4. Canadian National Railways 
5. Suncor Energy Inc
6. Bank of Montreal 
7. BCE Inc 
8. Valeant Pharmaceutical 
9. Manulife Financial Corp.
10. Enbridge Inc

As found on S&P Dow Jones Indices McGraw Hill Financial http://us.spindices.com/indices/equity/sp-tsx-composite-index#

The one that sticks out for me has to be Valeant Pharmaceuticals who have had a run in with shady business practices that may be in contravention with accounting standards and possibly open them up to criminal charges against those trying to fix the books. The company is being backed by hedge fund manager Bill Ackman who has faced a barrage of attacks on his credibility following the scandal. 

Let's get down to those charts; 

Quarterly

I've decided to take a quarterly view as I found the structure of the uptrend to be steady. I also converted the price from the standard linear scale to logarithmic to cater for the longer timed nature of the chart which goes back to 1988. The trend in question started at the end of 1992 heading into 1993 and produced rich returns for a number of years that followed. The first retest of the uptrend came in 2008/2009 in conjunction with the Financial Crisis. It's important to note that minimal damage had been done with an optimistic bounce off the 50 SMA (Yellow Line) back to the highs. 

It can be said that the returns produced in the years after the Financial Crisis have not been as fruitful as they had been previously which does suggest slower momentum to the upside. Presently the price has come back to the 50 SMA and it would seem as if the uptrend is within sight once again. The levels to be watched is 11 000. I highlighted in a blue circle the extent to which volatility could drive the price away from the 50 SMA only to bring it back into the trend. 

My thinking is we could see the same being exhibited with the current candle all the way down to 11 000. I've also circled the oversold condition of the stochastic with levels last seen almost 15 years ago suggesting relative far value.  On the whole a good looking chart and one to be looking out for. 

Monthly

The softer returns I spoke about after the Financial Crisis is clearly seen as the uptrend that stemmed from the lows of 2009 produced a flimsy uptrend that has been broken late last year which confirms my belief that there is a lack of stronger momentum to the upside. However in general terms the economy hasn't fully returned to normality after that shock and this index isn't an isolated case. 

What I'm interested in is the situation that has been developing over the past 6 months or so with the price being wedged between the 50 and 200 SMA (Yellow & Blue line respectively). Since price remains above the 200 SMA I still see a degree of bullish sentiment hanging around this index and it would put the bias in favour of the bulls. We could see consolidation taking place with the buyers trying to find stable ground to launch a fresh attack on the all time highs. 

The Head & Shoulder pattern formed on the stochastic is suggestive of a weaker hand from the bulls which has been the case so far and I would think they would need to put in a better effort in the months to come which is very possible given the US is in an election year and policy changes in regards to infrastructure programs could provide the boost needed to get things started again. 

    

That's the end of another exciting week of Travelling Technicals be sure to catch us next week as we delve into probably the most watched chart at the moment, the CSI 300 from China. If you have any questions you can post them to us at cadetrader@gmail.com, we loved to hear your feedback. Until next time folks...