CDN Financials Snapshot

Snapshot of TSX major financials.  The XFN (iShares) tracks the largest banks/financial deals in Canada (at the top) and I’ve selected to show charts for the top weighted components.  Top weightings include:

ROYAL BANK OF CANADA	RY	20.78%
TORONTO-DOMINION BANK	TD	15.66%
BANK OF NOVA SCOTIA	BNS	13.13%
MANULIFE FINANCIAL CORP	MFC	10.53%
BANK OF MONTREAL	BMO	8.13%
CAN IMPERIAL BK OF COMMERCE	CM	7.54%

All other holdings are about 5% and under.

Pay special attention to the strong uptrend Canadian banks were/are in right now.  RSI and MACD are mainly neutral for each of the following (a couple MACD neg. div showing now), uptrends have been bullish w/well defined runs and pullbacks.  Also remember that XFN reflects all of the movements of its component stocks and that those stocks all have different personalities, though they generally all move in the direction of the underlying industry trend.

XFN – market looks strong, meteroic rise, this won’t go on forever.  And volume up significantly from pre-crash levels.

TD – Another strong uptrend showing, pullbacks.  Loosely tracking 20/50MA.  Notice MACD negative divergence along with bearish MA crossover indicates possible intermediate high price.  These signals are fairly reliable (read not always) and give a strong signal that momentum strength and demand for the upside is waning.  It pays to record things like this in case subsequent signals give similar indications.  Note that the broader finance index (XFN) is not confirming this.  Neg div. gives some strength to the upper bound channel trendline.

RY – stable uptrend, not sloped like some of the others but consistent and tight.  Neg. div confirms with TD neg. div.

MFC – volatile.  consolidating – trendline might put a floor under this so pennant might break to the upside.  Note big sell-off just prior.  Someone doesn’t want this thing.

BMO – typical of the others.  Another slight neg. div.  We’re going to need to some market strength to pull these higher.  Latest momentum moves are weaker than the first few post March.

CM – Volatile and neg. div.  Watch for pullback resulting from possible breakdown of consolidation pennent.

Support and Resistance

Support and resistance are key factors in determining potential stock price strength and weakness.  When demand outstrips supply by a material margin, prices tend to get bid up as more and more buyers are competing for a relatively small pool of shares.  Prices move up because there will be some group of buyers that will offer more than others to get ownership of shares.  On the other hand, when supply outstrips demand, prices tend to get bid down as the relatively larger group of sellers compete with each other to offload their positions to the highest bidder.  As the number of sellers competing to sell increase, those who are intent on selling undercut the other sellers and hence this moves prices lower.  Ultimately when the demand force is stronger than the supply force prices move up and the inverse when supply overwhelms demand.

Price points or areas of support and resistance are neither demand side nor supply side driven only.  They are a combination of both forces that oppose each other, one weaker and one stronger.  If you think of resistance as a ceiling price for a stock then support is the floor.

GREED = DEMAND = SUPPORT

FEAR = SUPPLY = RESISTANCE

Support

As prices move down there will eventually come a point where either the price stops moving down, the descent slows or consolidates sideways or the price bounces back up.  This can occur for a variety of reasons.  Selling activity (supply) could dry up, demand could ramp up significantly as to absorb all of the supply or as usually the case, a mix of both.  The forces of supply and demand ultimately determine where this price point is as eventually one force will overwhelm the other and support will be realized.  There will always be buyers when prices get cheap enough.

Support is simply the price where demand equals or outstrips supply.  When prices move lower than support, support has been “broken”.

Resistance

Resistance is the upper price bound at which buying activity is expected to be thin, and thin enough to not support higher price competition where at the same time selling activity begins to ramp up.  As prices move up there will come a price where some share owners will decide to take profits or believe that prices won’t go much higher and by this point the shares are relatively expensive so the buying pool is much smaller than it was when prices were much lower.

Resistance is simply the price where supply equals or outstrips demand.  When prices move higher than resistance, resistance has been “broken”.

Finding Support and Resistance Levels

There are many support and resistance levels on all graphs, there is not just one.  They can exist in many forms and for that reason they can often cross and interact with one another in a variety of ways.  Prior price levels, trendlines, moving averages, channels, prior reversal points, fibonacci retracements, whole numbers, fundamental influences and so on can all provide support and resistance lines.  There is no 1-1 relationship between them either meaning that there is not a support for every resistance.

Support = Resistance

Technical analysis and more accurately support and resistance analysis is as much an art as a science.  There are hard rules and there are soft rules and all are often broken.  Quite often when a price breaks support then that support quite often becomes resistance.  The same is true when prices break resistance, that point often becomes support.  The easiest way to justify this “rule” is to think of price setting as an emotional and psychological process.  Traders are generally impatient and kick themselves for losing opportunities, typically they chase opportunities that get away from them.  True story.  As an example, lets say a stock has been bouncing around the $20 for a couple weeks after rising from $15 mark ($20 is resistance).  Suddenly it breaks through $20 and runs to $25.  Seeing that run some traders may kick themselves for missing the buying opportunity at $20 and think to “crap, if I can get that stock at $20 i’m a buyer”.  Days later there’s some profit taking and the price moves back to $20 and the traders buys those shares.  That trader is the demand side and if that demand side is big enough, it will absorb all of the shares for sale around that price and stop the price from falling past $20.

The opposite psychological process occurs when support turns into resistance.  As another example, say that same stock later falls to $15 and bounces around that level for a few weeks.  Seeing that level as support, many traders buy the stock at $15 expecting it to bounce off support and move back up.  Instead the stock falls to $10 leaving the trader with a fat paper loss.  At this point the trader just wants to avoid losing money so he decides that if the stock can be sold for $15, it’s gone and he’ll break even.  Sure enough the stock gets some buying underneath it and moves back to $15 where the trader sells.  Again, if the selling pool at this price point is large enough, supply will overwhelm demand and the buyers won’t be able to absorb the excess shares.  The price will bounce off the old support line which has now become resistance and head lower.

WHEN A STOCK MOVES UP THROUGH OLD RESISTANCE AREAS, THAT LEVEL BECOMES SUPPORT.  THE OPPOSITE IS ALSO TRUE.

Strength and Weakness

Prices tend to move in channels and like trendlines, channels provide good support and resistance.  The closer a resistance line is to current price action the more ability it has to hold the price down.  The farther away it is, the weaker it is.  There is a quiet balance somewhere in the middle.  ”Fresh resistance is fresh pain”

STOCKS FORMING MULTI-WEEK BASES (2-3 MONTHS) HAVE BETTER ODDS OF BREAKING INTO STRONG UPTRENDS.

Major Minor

3+ pivots indicates MAJOR support or resistance.  Look for support and resistance lines that have multiple multi-week touches.  Each touch provides an extra boost of validity to each zone and should increase confidence in the price’s ability to hold at that level.  Remember, not all support and resistance areas aren’t exact numbers, typically they’re more zone-like (price ranges).

Study market influence

Stocks are always influenced by outside factors, not just the technicals on their own charts.  Broader industry and market movements have a significant impact on price action so know the support and resistance areas for them.  Industry/sector/market support and resistance areas are tells of where chart specific support and resistance areas are more likely to hold or fail.  Know them.

Stock Stage Analysis

Cycles determine almost everything in this world, including the markets.  People, jobs, corporations and economies all go through cycles during their lifetimes, each starting small and immature, eventually growing and expanding into maturity and then shrinking and readjusting before once again growing and starting the cycle over again.  But economies don’t grow by themselves.  It is in fact the underlying corporations and people that grow.  Together the economies that corporations and people make up expand.  So it stands to reason that if economies go through cycles, the fundamental drivers of those cycles also go through cycles of their own.  And so they do, albeit at sometimes slightly different times.  All have their own cycles and all contribute toward larger parent cycles which in turn contribute to much larger cycles and so on.

In its simplest form, a cycle is made up of a low starting point, expansion, contraction and then back to expension again.  Graphically, it’s basically a sine wave.  Up and down and up again.  Financial markets call the low points the troughs and the high points the peaks.

Zooming into the corporate stock perspective, there are 4 so called primary stock stages: Basing/Accumulation, Running/Mark Up, Indecision/Distribution, Breakdown/Markdown.  There are various names used to describe them but these definitions work.

Stage 1: Basing/Accumulation:

• Sideways trading range/consolidation
• Indecision in price action
• Accumulation programs kick in
• Ideally 4-8 weeks long to create valid support zones and/or consolidation patterns
• Volume should be stable or increasing

Stage 2: Running/Mark Up:

• Optimism and/or euphoria, greed with significant demand at increasing price levels
• Volume sustained and expanding on price increases
• Corrections common on low volume (pullbacks in 5-10% range)
• Accumulation programs tailing off, marketing and promotion ramping up
• Higher lows and higher highs

Stage 3: Indecision/Distribution:

• Supply no longer being absorbed at high rate and buyers supporting high prices
• Peaking or topping movement common, high volume expansion on significant price increase
• Price volatility expands as supply and demand battle
• Late comers buying into price rises common here
• Eventually selling overcomes buying support and price cascades downward to next stage

Stage 4: Breakdown/Markdown:

• Fear and/or panic, shyness with significant supply at decreasing price levels
• Volume stable and price stumbles and starts its descent back to major supports
• Major programs primarily complete selling as prices move lower
• Lower lows and lower highs

** Draw some zones on a chart and know where the current personality of the stock.  Every stage can be bet differently so know the game before making the bet.

** Stocks generally fall about 2-3x faster than they rise.  Panic induced sell-offs will usually accelerate and hammer down prices very fast.  Dumb money is less cautious and thoughtful and more aggressive when they’re getting stomped.

GOLD

Continues consolidation in symmetrical triangle.  Note no strong trend leading into triangle – market dislocation and heightened selling saw markdown down but it snapped back into range quickly.  RSI/MACD neutral and not trending.  Watch late Aug/Sept for breakout.  Watch 200MA to provide support if the lower triangle trendline is broken.

Eyes on USD, broader economy strength (market, treasury auctions), technicals.  Will retrace to lower trendline on broader market correction.