May 21, 2010

CDNX Updated Chart: Next Week Will Be Very Interesting

The Venture is often a leading indicator so the fact it outperformed the major markets today and reversed ahead of them is highly significant and suggests the sharp correction here in May may have ended. Another wave down is still a possibility but today’s action was very encouraging. We’ll see what kind of follow through occurs Tuesday (Monday is a holiday). Our technical analyst examines today’s interesting activity below:

John: On the 7th trading day the BEARS rested. Today we saw the CDNX gap lower at the open and then slide another 7 points to 1393 before it reversed and climbed steadily throughout the day to close at 1453, a gain of 32 points from yesterday’s close.

Today we have a bullish white candle which starts below the low of yesterday and closes above halfway up the body of yesterday’s downward red candle. This candle formation is called a “bullish piercing pattern”. The white body “pierces” the recent downtrend with the bulls overwhelming the bears. The next trading day’s action should confirm this very powerful reversal pattern.

On the chart I have shown support levels (green horizontal lines) and resistance levels (blue horizontal lines). Early last week many of these resistance lines were support lines (support changes to resistance when it is broken).

In order to corroborate the reversal signal of this candle pattern we must look at the indicators.

The RSI(2) is a shorter period than I usually use but because we are looking at an extreme situation, I wanted to find out if this indicator would show an extreme condition. I have shown when the RSI(2) was at its lower extreme by the vertical blue dotted lines, i.e. when RSI(2) < 3. There are 4 shown and 3 of them occur when the RSI(2) is at or near zero. Yesterday’s RSI(2) was at or near zero, thus today we could expect a possible reversal, and yes it appears to have happened.

The same scenario occurred on January 19 and May 7. On February 4 the RSI(2) did not get to an extreme low but as the orange lines show, there was a negative divergence between the Index level and the RSI(2) value.

The Fast Stochastics indicator shows that today the %K (black line) crossed above the %D (red line) below the 20 level, creating a “W” pattern similar to the reversal on May 3. This indicates a strong probability of a reversal.

The ADX trend indicator shows the direction indicator -DI (red line) has reversed direction, thus reducing the strength and direction of the downward trend.

The immediate outlook for the CDNX is for a bullish white candle to occur on Tuesday, the next trading day for Canadian Exchanges.