Markets are strong across the board today with the CDNX up 36 points at 2280 as of 10:45 am Pacific. The CDNX has now climbed a whopping 226 points or 11% over just the last five trading sessions since last Tuesday’s intra-day low of 2054. We remain very cautious with regard to this move, however, and many of the Gold stocks are not going along for the ride. John updates the CDNX chart below, warning of a potential 3-wave or even a 5-wave correction.
John: This morning we’re looking at a 1-year daily chart of the CDNX in order to compare the current situation with a similar one in April and May of last year. Also, we will identify critical resistance and support levels and compare indicator readings of the two situations.
The early warning in each case was a divergence between the RSI and the Index. In April, 2010, there was a double top pattern and the RSI dipped from 85% to 60%. Similarly, in February and early March of this year there was a double top with the RSI dipping from 73% to 67%. In fact there has been a divergence between the RSI and the CDNX from January 1 to now, so there has been plenty of warning that a correction was going to occur sometime early this year. Divergences are quite reliable in identifying corrections but give no indication of timing.
The SMA(20) crossed down below the SMA(50) in the 2010 correction and is about to cross down again in the near future, another bearish factor. In each case from the start of the correction the volume declined. When volume declines during the B wave (upward) in a correction, this is very bearish.
When estimating the length of moves in a 3-wave correction it is usual to assume the length of the C wave will be equal to the length of the A wave but often the C wave is longer due to downward momentum as we saw in the 2010 correction. By assuming the C wave will be equal to the A wave and decline from the A wave’s 50% retracement level, the estimated bottom is 1849. This is graphically displayed in Saturday’s “Week in Review Part 1”. The all-important pivotal support levels (horizontal green lines) are shown as 2200, 2060, 1900 and 1680. A breakdown of the 2060 support level would verify that this is indeed at least a 3-wave correction.
Two resistance levels are shown (horizontal blue lines) at 2300 and 2448. The red Fibonacci set between 1358 and 2448 shows that the 61.8% and 50% are very close to the 2060 and 1900 pivotal support levels, respectively. This indicates support strength at these levels.
Looking at the indicators:
In both cases the RSI formed a bullish “W” formation. Do not be fooled by this. As you can see the 2010 correction continued to be bearish for another 2 months before the recovery began.
The Chaikin Money Flow (CMF) shows a sharp drop in buying pressure in both scenarios but after the 2010 correction the selling pressure was not heavy. The level of the selling pressure should be watched carefully because if it becomes strong the 3-wave correction could turn into a nasty 5-wave downtrend.
The ADX trend indicator has the -DI (red line) above the +DI (black line) and the ADX trend strength indicator is flat, showing that the short-term trend is bearish.
Outlook: The chart patterns and indicators all point to the probability of a 3-wave correction that could take the CDNX down to the 1848 level. The length of this 3-wave correction could be 3-4 weeks.
Hi,
On a weekly chart the ma50 is about to cross the ma200, isn’t a bullish sign?
http://stockcharts.com/h-sc/ui?s=$CDNX
just wondering because Im bit confused by all the bearish signs you see right now with gold and silver within the reach of new highs.
Comment by Slim — March 21, 2011 @ 10:41 am
Also, wasn’t 2200 a resistance level that has been crossed? I like you guys but only wish you were wrong on this one 🙂
Comment by STEVE — March 21, 2011 @ 11:51 am
2200 was one resistance level but the 2300 area is an even bigger hurdle to overcome. Many things concern both John and I, not the least of which is volume – just not there. Powerful moves require volume. We’re not seeing it which suggests this is a rally that can’t be sustained. Should be a very interesting rest of the week. Not a single gold stock among the top 10 volume leaders on the CDNX today.
Comment by Jon - BMR — March 21, 2011 @ 12:54 pm
Slim
The SMA(50) and the SMA(200) have periods of 50 weeks and 200 weeks respectively. Consequently they are slow to react to market moves thus they lag so much they are useless to indicate near term trend changes. Hope this helps
Comment by John - BMR — March 21, 2011 @ 1:57 pm
What is surprising to me is the gold price itself, seems with all of the turmoil in the middle east that the gold price should be reaching new highs with lots of volume and it just seems to be trading between 1395 to 1430. Will be interesting to see what happens from here over the next 2 weeks.
Comment by GREG — March 21, 2011 @ 2:21 pm
John BMR –
March 20th
Nurse Tammy Benoite
John BMR – Not a single gold stock among the top 10 volume leaders on the CDNX today.
Bert – Some stocks must have been up, otherwise we would not have seen a 1.84 % (41.37 pt)
rise in the Cdnx Index. With all due respect, when considering a drop in the index to around
1850, one has to consider ALL stocks. I feel optimistic to see the markets up with so much
turmoil in the world, take it away & happy days may return once again. I concede, we will
have our up & down days, but may we bounce back up as we move along. R !
Comment by Bert — March 21, 2011 @ 3:47 pm
In my last comment, disregard the first part, ”Nurse Tammy Benoite”, it was in my copy & paste & i
didn’t realize it. Sorry about that. R !
Comment by Bert — March 21, 2011 @ 3:51 pm
Where can one find a (volume) chart on the cdnx? Weekly,monthly,yearly..thx.
Comment by J.C. — March 22, 2011 @ 7:00 am