200 Day

by Zubin Driver
May 12, 2009

Apart from representing an explosive 36% gain, the monumental rally of the past two months has now lifted the TSX back to sit atop its 200 day moving average. While many market observers view technical analysis (the reading of charts as an aid to predict future price movements and analyse trends) as little more than doodling, many of us find it to be a useful tool for predicting where prices may go next.

Moving averages are lines drawn on charts that take the closing price over a set number of days to generate an average that is updated daily. The 200 day moving average, therefore, averages closing prices from the last 200 days by taking the new closing price for each day, adding it to the 199 days that precede it, and dividing by 200. In this way, a new coordinate is determined each day for where the line should be plotted on the graph.

The 200 day is the most commonly used moving average to point to the direction of the longer term trend. At 55% of one year's activity, the 200 day's direction is not quickly influenced by short term price spikes or dives; a healthy bull market trades above its 200 day moving average, a bear trades below.

Very encouraging then, to see the TSX, NASDAQ, and a number of stocks trading once again at or above their 200 day moving averages, which, it must be noted, still point down. Markets may well ride momentum for a little while further, thus flattening the downward tilt, and from a technical perspective, lending credence to the notion that the worst of the bear market is over. However: a 36% gain over a two month period constitutes an overbought state by anyone's definition--buyer beware! When the momentum does slow down, if the markets trade within 1000 points either side of the 200 DMA over coming months before trading above it in a stable fashion--a big if!!--then a sustainable recovery may be plausible much sooner than anyone would have predicted just a few months ago.

EFTA

Free trade with the U.S. is a natural and obvious occurrence due to geography, but the Canadian government is now working on a new deal, the European Free Trade Agreement. Initially the agreement will develop incrementally, starting on Canada Day with Norway, Lichtenstein, Switzerland, and Iceland. However, the goal is for the EFTA to include the whole EU by 2011, and cover essentially every conceivable area of trade in an agreement that will aid in facilitating the $112 billion in annualised trade that a recent joint Canada-EU study forecast by 2014.

After a signing ceremony in the Czech republic last Wednesday, Prime Minister Harper referred to the agreement as a "glimmer of light in the darkness of global recession," and it is indeed believed that this agreement sets an example for the path that countries committed to liberalised trade will follow. In Darwinian fashion, out of the current crisis new arrangements are evolving...

Deal time

This space continues to note the gains that have occurred on the venture exchange. It is frequently stated that out of recessions small cap stocks make the biggest gains, and the current year has provided numerous examples, the only problem of course being that most of us were already invested. Going from being down 90% on a small cap stock to only 50% may have meant a 300% gain for someone who bought at the bottom, but just means a smaller loss to the investor who bought this time last year.

If we are in a real recovery it is time to pick your spots, and deploy some of the cash that's waiting for the right moment. When the tide is moving in the right direction a lot more deals work out, especially those with the right people and projects. I am currently working on a couple of new financings, and welcome investors to contact me and participate.

Best regards,
Zubin

Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com

Canaccord Capital Corporation
Attention: Zubin Driver
P.O. Box 10337 Pacific Centre
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OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).