TSX Composite Breaking Out to All Time Highs, Positioned for Catch-Up Versus Global Markets
o The TSX Composite broke out last week to all time highs, confirming the resumption of the primary bull market. The move reaffirms our view that the weakness through the first three quarters of 2017 has been a healthy correction to work-off overbought momentum following a 38% rally from the 2016 lows. Weekly momentum indicators support the breakout as weekly RSI reversed higher off 40 and MACD is trending on a buy signal above the 0 line. Conservative technical upside measures to 18,000.
o Risk ratios in Canada continue to point to a risk-on environment. Three key ratios: Industrials vs. Utilities, Financials vs. REITs, and Discretionary vs. Staples ratios are all in a primary uptrend and breaking out to 52-week highs. The risk-on market structure supports further upside in the broader TSX.
o The nine month period of relative underperformance of Canadian markets is reversing trend as the TSX Composite begins to carve out an uptrend versus the FTSE All World Index. The relative ratio broke out from a multi-month downtrend in September and has held uptrend support on each subsequent pullback. Combined with a bullish shift in momentum indicators, the TSX is positioned to play catch-up versus global markets.
o On Friday, the TSX Energy Index broke out from a month-long bullish flag on the highest volume day since December 2016. Adding significance to Friday's move is the fact that price action reversed directly off a retest of the rising 50-day moving average and neckline of the June to September double bottom. Combined with RSI holding 40, MACD curling higher off the 0 line, and Full Stochastics triggering a buy signal from oversold levels, the breakout confirms our view that the technical structure of the sector has shifted from bearish to bullish. Next level of resistance exists at $12.90 at the top of the February to May trading range.
o Longer-term, we view the recent downtrend breakout as a bullish shift in trend within a larger inverse head and shoulders base that has been forming since 2015. The breakout is now forming the right shoulder after carving out a double bottom off a 2/3rd retracement of the 2016 advance (the maximum expected correction within a bull market). Weekly RSI has reclaimed bullish territory and MACD is triggering a buy signal, signaling price is positioned for a rally back to the neckline of the basing pattern near $14.50.
o Adding to our conviction in the energy sector is the relative uptrend the XEG has been carving out versus the TSX since July. The reversal off trendline support combined with momentum indicators reversing higher from oversold levels signal the resumption of the developing trend. As such, we maintain our overweight recommendation.
TSX Energy Index: Carving Out Right Shoulder of Multi-Year Base
TSX Energy Index Carving Out Relative Uptrend vs TSX: Maintain Overweight Recommendation