Just check out these charts:

Everything is screaming overbought. I think we are in a new uptrend and perhaps we will get a pullback on Greece news. Lumber, Copper, are in great shape. Here we sit. The COMPQ has blown through resistance. The SPX and Dow are testing the resistance areas this week. MSFT, WMT, INTC are moving into fresh air spaces on their charts.

$TSX – Flirting with the 200 DMA

$DJW – Flirting with the 200 DMA. This is a global stock index. So the trend is wider than the USA.

$AORD – Flirting with the 200 DMA

$CAC – Flirting with the 200 DMA

$NIKK – Approaching the 200 DMA

$KOSPI – Flirting with the 200 DMA

$CNXN – Flirting with the 200 DMA

That is a few indexes! OK. Lets see where this week takes us. I expect a pullback here, especially after Friday's rally.

It is the depth of the pullback that is unknown. Based on my chart work, we are now in a long term up rally. I think on the pullback, it looks like the commodities will join the party. That's a guess, but we'll have to wait and see.

Great meeting coming up on Tuesday  Feb 7 in Calgary. Myron Nowolselski is presenting some great work on bonds. It can be a very observant door into equities. If you can make it….book it at www.csta.org

As well two special events being held in Calgary. One with Tom McClellan on March 13,2012. The other with Ed Carlson on March 17th, 2012. Must be booked at www.csta.org

Can't line up talent like these 3 every month! Don't miss it if you can be in Calgary.

Good Trading,

Greg Schnell, CMT

My market message from Thurs, Jan 26th, argued for the inclusion of Canada in a foreign stock portfolio. I'm going to expand on Canada's unique role in the global intermarket picture in this message. In my view, Canada is unique for at least three reasons. First, it's very highly correlated to the U.S. stock market. That shouldn't be a surprise because Canada is the biggest trading partner with the U.S. It also means, however, that the two markets need to be charted together to ensure that they're sending the same messages. Another reason why Canada is important is because it's highly correlated to the Canadian Dollar. And the Canadian Dollar is closely tied to the trend of commodity markets. That's because Canada is one of the world's biggest exporters of natural resources. The Canadian markets, therefore, tell us a lot about the direction of global stocks, commodities, and currencies. Chart 1 compares the
Toronto Stock Index
(red line) to the
S&P 500
(blue line) since 2000, and is simply intended to show the close correlation between the two markets. Over most of that time, the correlation coefficient (below chart) fluctuated between .75 and 1.00. One exception was during the first half of 2008 when Canadian stocks kept rising while the U.S. market plunged (see circle). That was due to the fact that commodity prices kept rallying into the middle of 2008 before peaking. Canadian stocks peaked with commodities.

The 2012 trading year has begun with a "bang" to be sure. In terms of the S&P 500, we find that 16 of the 23 trading sessions have traded to the upside, with no losing session down more than -8 points or -0.6%. This is rather "one-sided", and it gives rise to thoughts that a correction must be forthcoming. Really, how could a rather sharp correction not take place given the European fiscal and debt crisis and the slowing the Chinese economy. There are so many negatives in front of everyone, there can't be any way the market should trade higher. However, one must try and understand the power of "money printing liquidity" provided by nearly all of the world's central banks.

We'll be the first to admit – we've been rather wrong-headed about this rally. There have been ample signs that this is nothing more than a counter-trend rally in a bear market, but then again there are technical signs it shall go further and farther than most believe. The question, is where do the probabilities lie in regards to this, and we look upon them in this blurb from the monthly perspective.

Quite simply, the risk-reward is to the upside given the October-2011 trade formed a bullish monthly key reversal to the upside – a signal that new highs were a higher probability than previously thought. Certainly given the European fiasco, one would have thought prices would trade lower; but when they did – it was only for a very short period. This is reminiscent of the pattern seen during the Russian debt crisis in 1998, when prices traded lower in October-1998 – only to trade over +40% higher in the ensuing 18-months. Frankly, the current technical pattern seem eerily similar from a corrective and MACD point-of-view – which would lead one to surmise that new highs in the S&P are forthcoming – in all probability into the 1600 area. But having said this, even if new highs develop, we would this as a bear market rally in much the same manner as those were in the 1970's trading range that broke to new highs only to falter massively in the months thereafter.

This is change in tenor for us; and one that we've held out for as long as we could. We are a "bear" with a bull hat on for the moment. The fact of the matter is that the S&P has broken above, and extended above all the necessary moving averages – which puts the risk-reward to the upside. There are other markets as well breaking out on a monthly basis such as Brazil, India and other Latin American countries – although China is not yet done so, or is even close for that matter. We've been bearish, and we've been rather wrong. Our outlook going forward will be for a weakening rally, with Energy, Healthcare and Gold/Silver shares leading the way. Moreover, we see an increasing potential for a "melt-up" to develop as rotation takes place out of bonds and into stocks. The low volumes associated with the markets at present certainly provide for this context.

So, the craziness continues…and we are left in humble stead to play "catch-up" until its time throw everything away again.