CDNX and Gold
The CDNX snapped out of a vicious 6-session losing skid Friday with a bullish white candle, violently reversing to the upside and finishing 32 points higher at 1453 (interestingly, its 200-day moving average). Was 1393 early Friday the bottom of this correction which began May 3? It is possible. Volume was light but so too was volume light at the market reversal in early February. The type of action we saw Friday – a quick plunge followed by an immediate reversal – is normally what we see at important market bottoms with the CDNX. From May 3 thru the low on Friday, the CDNX dropped 17.5% over 15 trading days, very similar to the 18% drop we saw in early January, 2008, over 12 trading sessions. The average CDNX correction since 2004 (excluding the extraordinary crash of 2008) has been 23% over 26 trading days. So here are three scenarios we could be looking at with the CDNX:
1. The market bottomed and reversed Friday with a new up-leg underway (1400 was very strong support in December and again in February, so it could be that this level is a very important floor for the CDNX in this ongoing bull market);
2. Friday’s action is a “bear trap” and the market turns lower yet again, finding support at 1300 – just below the 300-day SMA and in line with historical corrections (a 23% drop from the high);
3. The CDNX experiences a 30% correction, plunges to 1200 where there is extremely strong support, and a fresh up-leg commences.
Any of the above 3 scenarios is possible. What’s important to note, however, is that the CDNX remains in a long-term bull market which is defined by rising 200 and 300-day moving averages that are in no danger of reversing. The worst-case scenario downside risk from here is 17%. It makes sense, in our view, to hold some cash but also embrace the 235 point drop we’ve seen since May 3 by investing in quality situations that have been knocked down in price. Three months from now – maybe even within a month – this market is likely going to be significantly higher.
What was particularly interesting and perhaps critical about Friday’s CDNX action was the fact the Venture reversed ahead of the major markets and finished with a stronger percentage move as well. The CDNX has proven to be a very reliable “leading indicator” and what we saw Friday suggested a couple of things: 1) The correction is over with the broad markets which will now move higher; and 2) Gold is going higher, which indeed it is today.
Gold fell significantly last week but its long-term uptrend channels remain firmly intact. Gold’s moving averages also remain in bullish alignment, so there’s every reason to believe that Gold will strengthen from here and perhaps take another run at its $1,250 high. Some individual gold stocks are looking strong on the charts – Yamana Gold (YRI, TSX), for example, has been a bit of a laggard in the sector since the beginning of the year but its 50-day SMA has now turned positive. Its 200-day SMA is also rising. If Yamana is showing signs of moving higher, this bodes well for the price of Gold. The TSX Gold Index and the HUI are both technically very healthy and remain within their long-term uptrend channels despite taking a recent 10% hit.
