Equity Leaders Weekly

 Nasdaq Composite Index (NASD.I) & BMO China Equity Index ETF (ZCH.TO)

It has been quite a week for equity markets which finished off October with investors heading for the exits, but then turned around and have been rallying since the start of November. The US election has shoved aside earnings season and increasing lockdowns in Europe to take over the spotlight for itself, a situation which could continue in the coming days with the Presidential vote still unresolved and the likelihood of legal battles mounting. Despite the uncertainty in the Presidential race, markets appear to be responding favorably to the overall tone of the vote which saw the Republican majority in the Senate and the Democratic majority in the House of Representatives both decrease. The market appears to be thinking that the failure of a clear consensus to emerge from the vote (neither a Democratic Blue Wave or a big hidden Republican vote materialized), the parties will still need to work together and that the more extreme elements of their platforms will be difficult to pass or implement in the face of strong opposition.  The coming days bring a number of economic announcements, headlined by this afternoon’s Fed decision and statement (likely unchanged with the election still unresolved) and tomorrow’s US nonfarm payrolls plus Canadian employment reports. We’re moving into the back half of earnings seasons now, with the calendar dominated by a large number of reports from smaller and medium sized companies.In this week’s issue of Equity Leaders Weekly, we look at differences in market action and investor sentiment between the United States and China. 

Nasdaq Composite Index (NASD.I) 

The NASDAQ Composite Index (NASD.I) with its higher concentration in technology, communications and health care momentum stocks and lower concentration in the defensive utilities and consumer staples areas relative to the broad-based S&P 500, can provide insight into investor confidence and what more aggressive investors are thinking. Coming out of the February-March market crash, NASD.I led the recovery charge, breaking out to a new all-time high in July and carrying on upward through to Labor Day. In September, the NASDAQ staged a 10% correction in three days and at that time it was uncertain if the party was over or not. Over the last two months, however, a symmetrical triangle of higher lows and lower highs has emerged indicating that NASD.I has moved into a normal consolidation phase. This week, the NASDAQ has turned upward up off another higher low and has been clawing back some of last week’s losses. A breakout over 11,800 would resolve the triangle to the upside and signal the start of a new upleg which could potentially challenge previous column highs near 11,915 or 12,155. Initial support appears near 11,115 based on a 3-box reversal. A break of 10,900 would resolve the triangle to the downside and signal the start of a new downtrend. 

BMO China Equity Index ETF (ZCH.TO)

In last week’s issue of the Equity Leaders Weekly, we mentioned the struggles of European indices, particularly the Dax, in the face of increasing lockdowns on the continent. The story in Asia Pacific markets, however, has been very different. China, which had been the first country to struggle with COVID-19, has become one of the countries now leading the way on the road to recovery. As its economy has recovered, its stock markets have recovered, along with commodities sensitive to Chinese demand such as copper. The BMO China Equity Index ETF (ZCH.TO) broke out of a 15-month sideways trend back in June and staged an initial rally into July. For the last few months, ZCH.TO had been consolidating its initial gains, while a series of higher column lows indicated that underlying accumulation remained intact. This week, ZCH.TO has broken out to the upside once again, clearing $32.00 to complete a bullish Double Top pattern. Next potential upside resistance tests on trend appear near $35.70 and then $39.45 based on horizontal/vertical counts. Initial support appears near $32.00 where a retest of the breakout point and a 3-box reversal converge. In weeks ahead, the implications of the US election results (when fully decided) on US-China trade relations could also potentially influence sentiment toward Chinese equities in general, the technology and communications sectors in particular and commodities.   

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