Dancing with Bears

The S&P/TSX Composite is the headline index and the principal broad market measure for the Canadian equity markets. It includes common stock and income trust units. These include members of the S7P/TSX Equity indices, the S&P/TSX Equity 60, the S&P/TSX Equity Completion, the S&P/TSX Income Trust, the S&P/TSX Capped REIT and the S&P/TSX Capped Energy Trust. The market capitalization is about $3.6 trillion. Excuse the misprint on the last TSX report where the market capitalization was reported much higher. For more information on the make-up of the S&P/TSX go to http://www.tsx.com/.

The S&P/TSX Composite closed at a price of $9596.21 on November 7, 2008. The high over the last year was $15, 154.77 reached on June 6, 2008. The low over the last year was $8,537.34 reached on October 27, 2008. From the peak to the trough that represents about a -43% drop. The S&P has dropped –37.6%, so not quite as much but still significantly. While there are no hard and fast rules to a bear market definition, one commonly accepted one is a decline of more than 20% for more than 2 months. This is one tough bear that may not go away for a while so it might be worthwhile to look at some short term trading strategies using the index. Here is one way to dance with the bear.

There appears to be a head and shoulder bottom forming. The first shoulder was formed on October 16, 2008 with a low of 8,761 followed by a sharp move up to 10,251 on October 20 and back down to 8,537 on October 27 to form the head and currently the second shoulder appears to be forming. At the top the point of resistance is at 10200. If it breaks through this we could see a short term rally in this bear otherwise there is a trading range forming with support at 8,500 and resistance at 10,200. This represents almost a 20% range to work within. A bear market rally generally gives you a 10-20% short-term return potential. If you can’t beat ‘em you might as well dance with ‘em.