It has been a dramatic week on the markets. Calls for a 2008-style market meltdown are being heard in many quarters and bearishness has jumped drastically – that’s a good (contrarian) sign.
Yes, the CDNX as we’ve already pointed out is overdue for a nasty 20 or 30% correction (a normal event once every year or two in a bull market) and there is a risk we could be in the early stages of that now – triggered perhaps by a world financial panic over debt and other issues. The greater probability in our view, however, is that this 5-day slide we’ve witnessed represents a tremendous buying opportunity as every other pullback has with the CDNX since early last year.
The CDNX showed signs of strength and an imminent reversal today as outlined by our technical analyst below. It’s interesting to note that the CDNX RSI level is now at its lowest point since 2008. The CDNX also slightly outperformed the Dow over the last three days – this is significant because if we were in the early stages of a major free-fall, the Venture would be leading every market on the downside. Historically, that’s what we’ve always seen. A huge drop in the Venture is also not a likely event if Gold is performing well which it is – in fact, Gold appears poised to hit a new all-time high any day now.
Monday could be interesting. Be prepared for the possibility of one final “shakeout” right off the bat Monday – a nasty drop at the open to shake the last apples off the tree, followed by a dramatic intra-day reversal to the upside. It takes guts and nerves of steel to buy into a sharp drop like that – you really have to keep your emotions in check – but that’s how big money can be made in the market. We saw a reversal last Monday to the downside. We could very easily see another one this Monday to the upside.
John, BMR’s very astute technical analyst, saw evidence of a reversal today. Below is an updated CDNX chart with John’s comments:
John: Today was a red letter day for the CDNX for at the end of the day it gave us what we were looking for: a “Hammer“.
Looking at the chart, I’ve shown a green resistance line denoting the resistance from which Thursday’s candle bounced to a close a little higher. Today the CDNX dropped to a low of 1536 before climbing back during the afternoon to close right on that resistance line at 1549.
Let me clarify one point here: Although during the day the Index level went below 1549, it is not considered with the same importance as closing below 1549. By climbing back to that resistance level the candle formed a hammer (blue circle), a reversal signal. This must be confirmed by a white (bullish) candle on Monday.
What do the indicators tell us?
The RSI is well into the oversold region at 14.49 but is flattening, showing some strength is coming back.
The Slow Stochastics has both the %K and the %D in the oversold region with the %K (black line) starting to turn up. This too is showing a reversal could be just around the corner.
The only change in the ADX indicator is the -DI indicator is starting to turn down and the +DI indictator is beginning to turn up. Both are bullish signs.
Next week we should see a turnaround in the CDNX, starting with a bullish white candle on Monday. We could have a very good week. Even if it does not climb much, it will construct a firm base.