|For the first time, this Canadian index surpassed the Dow Jones Industrial Average (DJIA) as it recently hit a peak just over 14,600 vs the DJIA 14,000. The extra juice came from the heavier oil and gas weighting. These indexes will probably stay neck-and-neck for a while unless oil prices plunge.|
|A stock or an index on a strong run will stay above its 20-period exponential moving average (EMA), and this was aptly illustrated (Figure 1). Note the doji candlestick marking the bottom on this chart. Dojis often mark important turning points. Confirmation of a turnaround came in two flavors. The index finally beat overhead 20-day EMA resistance and the directional movement indicator at the top of the chart flashed a buy signal (directional indicators crossed over). Now a topping formation has appeared on this chart via a small-bodied candlestick with a long upper shadow. Whether you call this a near doji or a shooting star candlestick, the top warning remains the same. Confirmation comes with the completion of the August candlestick and subsequent ability to beat the previous high-water mark.|
|FIGURE 1: TORONTO STOCK EXCHANGE (S&P/TSX COMPOSITE), MONTHLY. How far will she go? Will this be a modest dip or a bigger correction?|
|Graphic provided by: StockCharts.com.|
|Two downside targets are considered on this monthly chart (Figure 1). Note how the 20-day EMA and the 50-day EMA currently relate to previous support and resistance levels marked by horizontal lines. If support holds at the 20-day EMA, the strong uptrend is intact. If that support fails, the 50-day EMA may come into play, currently 11,000. Should that also fail, a major decline is likely under way under the 10,000 level.|
|The indicators under the chart show mixed sentiment. The moving average convergence/divergence (MACD) still shows a strong uptrend, but its histogram does show negative divergence. This sometimes reveals a coming change or reversal ahead.|
The relative strength index (RSI) shows an overbought condition not likely to continue much longer. The stochastic oscillator also reflects this overbought condition. When the market is in a strong uptrend, this oscillator will stick high, as it's considered a nontrending indicator.
|In summary, an adage comes to mind: What goes up must come down.|
It's been a grand run. How far down does she go? Will this be a modest dip down or a bigger correction? Only the market knows for sure, but charts help navigate the waters and hopefully keep some of us off the rocks, should a perfect storm arise.
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