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While the current rage is to invest globally, I believe you should keep it simple and invest locally.
Technical indicators suggest that the Canadian dollar is headed substantially higher, thus investors diversified internationally will find a stronger Loonie eating into profits unless proper hedges have been established.
The Canadian dollar index completed a 14-1/2-year bullish saucer bottom pattern in May 2006 when the dollar reached a peak of 91.36 (U.S.) cents. A subsequent eight month consolidation has given way to a rally which appears ready to challenge the 2006 high. Although the daily chart suggests the rally is overbought and we could expect some backing and filling, the weekly chart indicates further advances are possible. The saucer bottom's technical target measurement suggests a potential target of $1.18 over the next two- three years.
The Outlook for the TSX
In my late March column, I suggested that the TSX lows were in and that investors should prepare themselves for rallies ahead. Now it's a month later and the TSX Composite index is registering new all-time highs. In fact, just two trading sessions after I first wrote the March column the market raced through my first target of 13,004 and in mid-April it vaulted through to my next target of 13,550. The TSX Composite's inverted head and shoulders pattern from April to October 2006, suggests the potential target of 14,196 may be achieved in May rather than November.
Although the current daily chart indicates that the index is overbought and the MACD has issued a sell signal, investors may be well advised to buy the dips given the market's technical prognoses. So where have all the doomsayers disappeared to now that the market is on fire again?
The Outlook For Oil
With the TSX Composite Index primarily based on the resources sector, you would expect that investors should be heavily weighted in oil and mining stocks. A review of the weekly June Light Sweet Crude Futures chart reveals that although the MACD is indicating a preliminary buy signal from a very oversold level, the stochastic indicator is in overbought territory. Also, the contract traded up against resistance, near the overbought Bollinger band, and the week ended March 30 formed a bearish harami candlestick indicating a temporary pause in the advance.
The bearish harami candlestick is a combination of two candlesticks. The first is a tall white candle, which signifies strength but is followed by a small candlestick signifying uncertainty. The Japanese say this indicates the market is losing its breath.
The subsequent consolidation held at the10-and 20-week MA's at about $62.60 and although crude prices corrected, oil stocks remained firm during that period, suggesting that the pull-back was not to be viewed as a significant event. In fact the crude contract appears to be in the midst of forming a bullish inverted head-and-shoulders pattern and the pull-back occurred at the pattern's neckline. Although some sideways action may be anticipated as the pattern's right shoulder forms, a weekly close above the neckline at about US$68.15 would suggest an upside breakout. Once that target is met oil futures should surge to new contact highs at about $83.57 possibly over the next eight months.
As the Canadian dollar and oil prices appear poised to head higher, which will positively impact the resource laden S&P/TSX Composite Index, investors may be well advised to buy “Canadian.”