Saturday, June 7, 2008

The Carry Trade, The TSX, and Oil Stocks

If yesterday's market activity could not compel me to write for this blog, then I don't think anything would. Besides the obvious headlines you have probably already read regarding Crude Oil and the Dow Jones, there are many other interesting developments that I feel are going on behind the scenes that are just as significant.

In the previous post that I wrote, I mentioned that the VIX was bouncing off support, and that this would negatively affect the TSX. So far, the VIX has bounced quite strongly, but this has not yet had a major effect on the index, although I think it will shortly.

Another theme that I touched on was the relationship between the TSX and the Japanese Yen. Here is an update of the same chart I posted last time:

As you can see, the Yen is still holding support. I feel that if the Yen bounces of this support area, it will negatively affect the TSX.

To look at this relationship at another angle, I sometimes like to look at the Yen/Euro cross versus the TSX. This is what this next chart does:

Hopefully, if you glance at the above chart, you will see a mirror image, even though the two charts are measuring completely different markets. What we have is the Yen/Euro cross on the top panel, and the TSX on the bottom panel. If you are unfamiliar with the rationale of the above chart, I would recommend checking out this article.

While I was on holidays, I spent quite a bit of time trying to develop new techniques for analyzing the markets. One technique that I developed came to me while I was reading an article from HeadlineCharts:

What we have in the above chart is another candle chart of the TSX, and a ten day moving average of the inverted put/call ratio as a solid line layered on top. I realize that the put/call ratio is not measuring option activity for the TSX, but, nonetheless, there seems to be a reasonably tight correlation between the two.

The way this chart would work is to look for divergences between the two graphs. It seems that there is bearish divergence building for the TSX presently.

The only sector keeping the TSX afloat right now is the energy sector. But, like an engine running one just a few cylinders, a market deriving strength on just a few sectors is likely to stall. What I found bizarre yesterday was how poorly energy stocks did considering how strongly crude oil rose.

In the last post, I showed a chart of stock that had caught my eye, Petro Canada. Here is an update on that chart:

The above chart shows Petro Canada, ticker symbol PCZ on the NYSE. I felt that this stock made an extremely rare and bearish candle formation as outlined in my previous post. What I find interesting now is that yet another shooting star was put in on Friday. Furthermore, I find it bearish that this stock was only able to rally by 3 cents a share while crude oil rose by more than ten dollars a barrel yesterday.

Basically, I feel extremely bullish on crude oil for the long term. I have read about half a dozen books on the subject of peak oil, and fully believe the arguments that are made. However, as a technical analyst, I feel bearish on oil stocks right now for the short term.

Anyway, I know I have not posted much about gold recently. This is because I am not getting any decisive signals on the market, and I don't want to make forecasts just for the sake of making forecasts.

I will continue writing posts every weekend from now on. Thanks to those who wrote comments or emails.

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