As is common on days when U.S. markets are closed, and news flow is light, Canadian markets are up slightly in quiet trading. The S&P/TMX 60 has been holding near 625 while the S&P/TMX Composite has been holding above 10,200.

This may, however, be the calm before the storm as next week may provide a key measure of investors’ bullish convictions heading into the second half. While we saw a significant market recovery in the last quarter, recent economic data suggests that even though the worst may have passed, the lingering effects of the recession may overhang markets for some time. In addition, it appears that while a recovery appears to be coming, it may be long and bumpy with the risk of disappointments along the way. This suggests that investors who had been anticipating a strong and quick recovery may be disappointed.  

With earnings season starting in a couple of weeks, investors may start to get a better indication of where managements’ see their business heading in the next few months, and these outlooks may play a key role in driving investor sentiment through the rest of the summer.

In four of the last six quarters, equities have sold off ahead of earnings season. Also note that in the 2002-2003 market bottom the final low occurred eight months after the first lows (July 2002-March 2003), and that July 2009 marks eight months from the November low.  Combined, these cycles suggest that we may be entering a period of potentially higher risk. Current significant support levels include 8,100 for the Dow Industrials (US30 CFD), 880 for the S&P 500 (SPX500 CFD), 1,425 for the NASDAQ 100 (NDAQ100 CFD), 580 for the S&P/TMX 60 (Toronto60 CFD) and 9,800-10,000 for the S&P/TMX Composite.

Should these levels hold, it may indicate strong underlying bullish support and the potential for continued gains later in the year after a possible summer of consolidation which is what essentially occurred in 2003 after the March low.

Should these tests fail, however, it would suggest that a deeper correction may be needed, possible to retest the November lows which were near 7,400 for the Dow, 730 for the S&P, 1,000 for the NASDAQ.

Although the Canadian November lows were 450 for the 60 and 7,800 for the Composite, note that the March 2003 lows in Canada were much higher than the July 2002 lows. This suggests that with commodity prices having rebounded, Canadian markets may not necessarily need to retreat back to the November lows even if U.S. markets do.  

Note that a July retest of the November lows would complete the right shoulder of a bullish reverse head and shoulders pattern with the March low (head) balanced between the shoulders (November and potentially July). Such a formation could set up the potential for a significant rebound later in the year as well.

Overall, this suggests that while the next 2-3 weeks appear to be a time of significant potential risk for equities, there also appears to be the potential for additional market advances later in the year.  

About CMC Markets

CMC Markets is Canada's leading online CFD provider and was the first company in the world to offer online FX trading. With offices in Toronto, CMC Markets has been offering CFDs and FX to Canadian traders since 2005. The company now operates over 20 offices worldwide, and represents clients in over 85 countries. CMC Markets was founded in 1989 by Peter Cruddas and in December 2007,Goldman Sachs acquired a 10% stake.

For more information on CMC Markets visit www.cmcmarkets.ca

This commentary is based upon technical analysis.  Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements.  Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision. 

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