Are markets having deja vu all over again?

It appears that a distinct quarterly trading pattern may be emerging this year. In the first half of this year, equities sold off dramatically in January and March on concerns about corporate earnings and the health of the banking sector. Once earnings started to come out in late January-February and late April-May, however, markets rebounded as earnings turned out to be not as bad as feared and investors realized that not all banks are on the verge of bankruptcy. This pattern appears to be playing out once again this quarter, with markets having sold off earlier this month, apparently on concerns over the banking system and earnings reports, but rebounding this week as results started to come out in earnest. Earlier this week, the Dow Industrials (US30 CFD) and S&P 500 (SPX500 CFD) completed bear traps just below 11,000 and 1,225, respectively, and now appear to be moving toward a test of resistance near 11,500 and 1,250, which coincide with the January lows. It appears possible that in the coming weeks, markets could stage a common 50% retracement of their May-July decline, which would suggest that the Dow and S&P could climb toward 11,980 and 1,320, respectively, even within the context of a longer-term downtrend.

Another theme that seems to be playing out this year is a battle between hard assets, such as commodities, and paper assets, such as equities. It appears that capital has been rotating back and forth between these groups following the rises and falls of confidence in the U.S. banking system. This appears to have particularly impacted trading in precious metals such as gold and silver, which peaked when equities bottomed in March, consolidated through the spring while equities rebounded, and rallied earlier this month when equities sold off. Currently, it appears that some capital may be flowing out of commodities again, but so far gold and silver have been holding above their $950/oz and $18.50/oz breakout points, which suggests that they may be consolidating their gains in the near term. Crude oil, on the other hand, appears to have been impacted more dramatically by capital moving back out into equities this time than it was in the spring, but at the moment, crude appears to be stabilizing as well, trading back above $135/bbl this morning. Note that crude oil faces potential upside resistance in the $145.00-$147.50/bbl range with potential support near $131.50/bbl and $122.00/bbl.

Canadian share update: Will high energy prices flow through to producers’ bottom lines? Base metals and financials bounce

Nexen (TSX: T.NXY, Stock Forum) has declined by 4.8% this morning after its latest quarterly report raised questions about energy producers’ ability to convert high commodity prices into earnings. Although revenues in Q2 increased by 48% over year to $2 billion, EPS only grew by 2.8% to 72 cents, apparently due to increased stock-based compensation for employees.

Sentiment appears to be improving, however, toward the Canadian banks, which appear to be rallying for a second straight session, likely in sympathy with the turnaround in U.S. financials. Building on yesterday’s momentum, CIBC (TSX: T.CM, Stock Forum) has advanced 3.5%, Bank of Montreal (TSX: T.BMO, Stock Forum) has advanced 3.4%, and Bank of Nova Scotia (TSX: T.BNS, Stock Forum) has gained 2.2%. In particular, note that Bank of Montreal appears to have completed a bear trap near $38 and may have also completed a double bottom. Initial upside resistance appears near $45, then $52, with a 50% retracement of the last downleg appearing near $45.

Selected interest appears to be returning to the base metal sector this morning with FNX Mining (TSX: T.FNX, Stock Forum) climbing by 7.6% and breaking through the $20 level, and Lundin Mining (TSX: T.LUN, Stock Forum) rising by 4.7%. With its gold and precious metal spin-off deal underway, FNX could bounce toward $22.50 in the near term where a previous support level and a 50% retracement of a recent downswing converge.

Finally, investors should note that upward momentum in CanWest Global (TSX: T.CGS, Stock Forum) continues to emerge. Since reporting that May quarter revenues rose 15% over year to $852 million, and earnings were above expectations on strength in the Specialty TV and publishing operations, sentiment toward the company appears to have been improving. Today, CanWest has gained another 8.2%. Initial potential resistance levels appear near $2.80 and $3.40.

Upcoming educational webinars

In the coming months, Colin Cieszynski will be presenting a series of free webinars on trading for accredited investors from coast to coast.

Date Time Topic

July 22 7:30 pm ET Developing a Trading Strategy 1:
What Kind of Trader Are You?

For more information on these and additional CMC Markets seminars, please go to CMC Markets Seminar Registration Page at http://www.cmcmarkets.ca/en/content/education/free_seminars.do

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.

This commentary is provided for informational and educational purposes only. Nothing contained in this commentary is intended as investment advice or a recommendation or solicitation to buy or sell. All opinions expressed are current as of the date of publication and subject to change without notice.

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ABOUT THE AUTHOR

Colin Cieszynski, CMC Markets

Colin Cieszynski,CFA, CMT is a Market Analyst and Manager of Education with CMC Markets Canada. Currently, Colin provides daily technical commentary on North American equity markets and selected commodities. Colin joined CMC Markets from Canaccord Capital, where he provided market commentary to individual investors for the last ten years and daily technical notes since 2001.

Colin has completed both the Chartered Financial Analyst and Chartered Market Technician programs. He is a member of the Market Technicians Association, the Canadian Society of Technical Analysts, the CFA Institute, the Toronto CFA Society and the Prospectors and Developers Association of Canada.

About CMC Markets

CMC Markets is Canada’s only online CFD provider and its affiliate, CMC Markets UK plc, was the first company in the world to offer online FX trading. CMC Markets UK plc has been offering CFDs and FX to Canadian traders through the services of CMC Markets since 2005.

Founded in 1989, CMC Group has 22 offices worldwide, including Toronto and Vancouver, employs in excess of 1,000 staff and represents clients in over 70 countries. Between November 2006 and October 2007, CMC Group handled over 16.2 million trades with a total value of over US $1.1 trillion, across the full product range. In December 2007, Goldman Sachs acquired a 10% stake in the CMC Group.

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