ETF Play: Canadian Rally

Canada has seen its equity markets power higher recently, possibly on the Chinese stimulus announcement as well as the "risk on" period we've been experiencing in the U.S. The Canadian iShares ETF (EWC) had been knocking up against a falling trendline for the last year and half before breaking above it in mid-August.

TEST BREAKOUT POINT
When we see a trendline break like this, it's nice to see price test the once-resistance and show it acting as now-support, which EWC got close to doing six days ago. Shares of EWC have also gapped up twice in the past two days, but have done so on declining volume (not shown).

IS THERE CONFIRMATION?
When we see advancements in price like this, we want to see price and volume momentum confirm the action. Using the relative strength index (RSI), seen on the top panel of the chart, as our measurement of price momentum, we see the RSI breaking above 70. Some traders view that positioning as being overbought, but it does, in fact, confirm the new short-term high reflected in price. With price momentum making new highs, this is a positive sign for the rally to continue, although the RSI may be getting a little frothy at this above-70 area.

VOLUME INDICATOR
Turning to volume we see a different picture. For volume momentum I'm showing the money flow index (MFI) which attempts to measure buying pressure, taking volume into account to measure momentum. Over the past couple of weeks the MFI indicator has been declining (bottom panel of chart), creating a negative divergence with price. These types of negative divergences put up a warning flag that there might not be very much participation in the rally.

Looking ahead, we will watch to see who wins the momentum battle, price or volume...time will tell.

Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.