The CDNX broke through important support at 1440 yesterday, shedding a whopping 42 points to close at 1410. BMR’s technical analyst takes a detailed look at the CDNX below and sees the potential of some further downside. But we caution investors not to panic even if the market takes out the May low of 1393. For various technical reasons John sees initial strong support at 1370 if the May low is breached. The 1370 target also happens to be in the immediate vicinity of the CDNX’s rising 300-day moving average. In the 2003-2007 bull market, the CDNX fell very marginally below its 300-day SMA each year before rebounding sharply each time. We could see a repeat of that here in the summer of 2010. It’s important, in our view, to understand the “big picture” despite all the fear-mongering that is so prevalent right now – what we’ve been witnessing the past couple of months is a normal CDNX correction within an ongoing bull market. This has been a frustrating market lately, punctuated by some deceiving moves to the upside, but we’re not on the edge of a 2008-style meltdown – the dynamics back then were much different and the technicals were far worse. Rising long-term moving averages (200-day and 300-day) are underpinning this market and will provide strong support and prevent the kind of meltdown we saw two years ago when the current favorable technical conditions did not exist. Below this chart is John’s near-term analysis:
John: The CDNX joined all the other indices on a joyless ride to the downside yesterday. The market deteriorated throughout the day and closed at 1410 for a loss of 42 points (2.86%) on slightly higher volume than Monday.
Looking at the chart, I have drawn a 21-day Symmetrical Triangle, two sloping blue lines and a vertical green line. The Symmetrical Triangle is a consolidation pattern which can be classed as a reversal pattern when it occurs after a downtrend or a continuation pattern if it occurs during an uptrend or downtrend. Theoretically, it can break in either direction but it usually breaks with the prevailing trend. In this case it was a continuation triangle because the CDNX has been in a downtrend since May 3 as shown by the ADX trend indicator and the -DI above the +DI during that period.
We can estimate the Symmetrical Triangle support level target by adding the length of the vertical green line to the level of the breakout. The length of the green line is equal to 1515 – 1435 = 80 points. The breakout level is approximately 1450. Therefore, the Symmetrical Triangle support target is 1450 – 80 = 1370. This is shown on the chart. Two other possible support levels are also shown as horizontal green lines.
Looking at the indicators:
The RSI(2) indicator shown is a short period indicator which I use to identify the strength of the move. In this case the RSI value is 3.78. I expect another drop today because the RSI value is not down to zero – bearish.
I have shown instances on the chart (vertical blue lines) when the RSI reached zero and the corresponding Index level.
The ADX trend indicator, as mentioned above, has shown the CDNX to be in a downtrend and with the -DI climbing I expect the weakness to continue. The ADX (black line) trend strength indicator is at 29 and turning up with room to move higher without expecting a reversal – bearish.
The Slow Stochastics indicator has the %K (black line) very low in the oversold region and the %D (red line) above it but turning down – bearish.
Outlook: The CDNX is in a bearish state for the short term until it reaches a viable support level. The most probable one is around 1370.