John: Yesterday, the CDNX gapped down at the open to 2264, hit a low of 2220, and then rallied late in the day to close at 2248 for a loss of 37 points (1.34%) on strong volume. Precious metals and commodities across the board were weak.
Looking at the 3-month daily chart we see that during January and prior to yesterday’s trading the CDNX had formed an ascending triangle with the top resistance (blue line) at the 2300 level and the upsloping trendline (green line) providing support. We can also see that it was decision time yesterday because the trading was almost at the apex of the triangle. Thus with yesterday’s trading the CDNX either had to get through the resistance at 2300 or break below the supporting trendline.
The expectation of an ascending triangle is that it will usually break out to the upside but that didn’t happen this time with the CDNX. On several occasions this month the bulls have tried to break through resistance at 2300 but the bears have repulsed their attacks. A divergence between the RSI and the 2300 level is a strong indication of the bears’ power at the moment. Another factor in the bears’ favor is the declining buying pressure as denoted by the CMF indicator. So the big question for yesterday was, would the CDNX break to the upside or the downside? The answer was quite clear right from the opening bell with the CDNX gapping down 20 points. The CDNX fought for most of the day to stay above strong support around the 2200 level and managed to do so.
Yesterday’s action has changed the chart picture completely. We can now draw the pattern for January as a horizontal trend channel between a low of 2200 (horizontal green line) and a high of 2300 (horizontal blue). What all this indicates is that the Index needs more time to unwind December’s overbought condition. This formation is not a consolidation because the average volume has remained constant.
Looking at the Indicators:
The RSI is unwinding from the overbought condition in December and is currently at the 57% level. As stated above there is a negative divergence with the Index level. The previous RSI support level was at 50% so there is probably more unwinding to be done.
The Chaikin Money Flow (CMF) indicator shows the buying pressure peaked on Jan. 17 but Wednesday and yesterday it fell to a still bullish 0.302 due to the overall down market effect as buyers backed off and waited for lower stock prices.
The ADX trend indicator is in a very bullish orientation with the +DI (green line) at 42 and above the-DI (red line) at 31. The ADX trend strength (black line) is high at 46 showing that the CDNX trend is still very bullish, very strong and steady.
Outlook: It’s expected that there will be more softness in the CDNX for the immediate future to completely unwind the previous overbought condition. However, this is not a bad thing for it will prepare the bulls for a stronger attempt at breaking through the 2300 resistance. The primary bullish trend is still very strong.
