Join our community of smart investors
OPINION

Tip top, tipping and toppling

Tip top, tipping and toppling
July 30, 2014
Tip top, tipping and toppling

But before you roll up your sleeves, remember: important market tops can only occur following a proper rally of decent proportions. That the size and speed of the chart pattern at the high should be proportional and related to price action on the way up. And that the more symmetrical and clear the topping formation, the more likely it is to fulfil its downside measurement targets.

Keep in mind that charts of many individual shares will look similar to those of their indices; studies suggest that up to 80 per cent of their price moves are caused by shifts in the latter. The most interesting shares are therefore those that do not conform.

First off, Toronto's S&P TSX Composite covering 95 per cent of Canadian equities and one of the largest stock exchanges in the world. An irregular double top above 15000 in Q3 2014/Q2 2015 reflects the struggle it had here in 2008. Five consecutive monthly declines and this large 'M' shaped pattern was complete with September's close below 13800. Conservative measures from the height of the pattern suggest losses to an initial 12500 and then 11700, at which point it would have given back almost half the gains since 2009's low.

 

Toronto S&P TSX

 

The Swiss Market Index dropped sharply from a new record high this quarter, where it had peaked in Q2 2007, taking it back below the peaks of 1998 and 2000. Price action since Q2 2014 can probably be best described as a broadening top - a notoriously difficult shape to recognise and work with. A September close below 8400 (lowest within the shape) should add to bearish pressure and send it down to 7700 and 7100 if enough momentum builds, again retracing half of the rally since 2011.

 

Swiss Market Index

 

South Korea's Kospi of just 11 leading companies peaked for a third time around 2,100/2,200 following consolidation in a huge triangle since the record high. There is a chance that the dip below its bottom edge was a false break and that we might revert to hovering around 2000 until year end. However, if we see one or more monthly closes below 1800 then expect a sharp drop to 1400 - a rather nasty 61 per cent Fibonacci retracement.

 

South Korea Kospi

   

Finally, Brazil's Ibovespa - which has not been adjusted to reflect the real's plummet this year. Following three consecutive monthly declines we are currently closer to 2008's low than the record high; it looks as though 33300 will act as a magnet for another round of capitulation.

 

Brazil Ibovespa