Today could represent a significant change in sentiment toward equities, particularly in Canada. Equity indices across North America have declined, following overseas markets lower. These declines appear to have been sparked by comments made last evening by U.S. Fed Chairman Bernanke. Mr. Bernanke noted that recent increases in oil prices have raised concerns that these increases may start to affect inflation expectations. He also suggested that the central bank would “strongly resist an erosion in longer-term expectations” believing that such a change could destabilize economic growth.

This suggests that in order to address rising commodity prices, the Fed may need to stop lowering interest rates, possibly raise rates, or take other measures to reduce liquidity to fight off inflation. These types of moves, however, may also remove economic stimulus and could increase expectations of either a deeper economic slowdown in the U.S. or a slow recovery, either of which could lead to a longer period of slow economic growth, which could have a negative impact on sentiment toward equities.

The Fed does not appear to be alone in its concerns. This month, in a two-stage process, the Bank of China is raising its reserve requirements from 16.5% to 17.5%, a move that appears to be aimed at slowing economic growth. This change appears to have had a particular impact on the Hang Seng Index, which dropped 4.2% overnight.

These central bank comments and moves appear to have had the most impact on the shares of resource producers. In the U.S., where broad markets have been trading nearly flat, many of the groups that have posted significant declines include integrated oils, oil and gas equipment and services, fertilizers, and diversified chemicals. Meanwhile, in Canada, the S&P/TSX Composite has dropped over 100 points with declines led by the materials and energy groups. This suggests that some investors may be starting to expect that slower economic conditions and central bank moves to take the edge off commodity demand may have an impact on pricing in the coming months.

In particular, crude oil may be starting to appear technically vulnerable. While energy equities have fallen this morning, the oil price has continued to advance, creating a negative divergence. Considering that over the long term energy equities have tended to lead energy commodities, this divergence may be viewed by some investors as a negative portent for crude oil.

Similarly, the underlying demand structure for crude oil may be changing. Earlier today, the IEA cut its forecast of global oil demand growth to 0.9% from 1.2% and suggested U.S. demand could fall by 2.5% this year. This suggests that while current trading momentum could still carry oil toward a $147.50 measured objective in the short term the risk of a correction back toward the $120/bbl to $125/bbl range appears to be increasing. Currently, the old resistance level near $125/bbl appears to have become an initial support level, but should this falter, sentiment could change.

Where does this leave equities? With U.S. markets still unable to get back above recently broken support levels such as 12,350 for the Dow Industrials (US30 CFD) and 1,360 for the S&P 500 (SPX500 CFD) it appears that the current downdraft remains intact. Current support for these indices appears near 12,200 and 1,350 respectively, but should these fail to hold, the next significant support may not appear until closer to 12,000 or 1,325, respectively.

Canadian equity markets also appear vulnerable at this point. The S&P/TSX 60 (Toronto60 CFD) appears to have completed a double top near 900 while the S&P/TSX Composite seems to have encountered significant resistance in the 15,000 to 15,100 range. In the short term, these indices could fall to test key long-term support/resistance levels near 960 and 13,650, respectively.

Canadian share update: InterOil soars on new exploration results

One exception to the somber mood that had overcome energy equity trading today has been InterOil (TSX: T.IOL, Stock Forum). The company announced that a recent test of its ELK-4 well in Papua New Guinea increased the hydrocarbon column by 184 feet and had a calculated stabilized flow rate of over 160 mmcf/d. With the company having put its financial difficulties behind it last month, investors now appear to be more focused on the company’s exploration potential. Today, InterOil broke through resistance at $30 and a measured move from the recent $24 to $29 range suggests a $34 objective could be attainable over time.

Upcoming free seminars

In the coming weeks, Colin Cieszynski will be making a number of free presentations for accredited investors across Canada.

Location          Date                Time                Topic                                      

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

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                                      

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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