TSX index forms inverted H&S as commodity prices sink

Canadian stocks are underperforming their developed market peers as concerns about commodity prices and the country’s economy remain. The blue-chip TSX Composite index closed at $20,606 on Thursday, a few points above its lowest point in 2023.

Commodity prices retreat

The Bloomberg Commodity index has been retreating in 2023 amid rising concerns about the global economy. With the yield curve inversion continuing, investors believe that there will be a recession in the coming months. At the same time, the recovery of the Chinese economy seems to be off to a slow start.

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Commodity prices are also struggling because of the strong economic data from the United States. As I wrote in this report, some Fed officials have started warning that they will support a 0.50% rate increase in the coming meeting. As a result, the BCOM index is trading at the lowest point since January 2022 having crashed by over 22% from its 2022 high. 

Canadian stocks have a close correlation to commodities because of the vast resources the country has. As a result, many companies in the industry have retreated this year. For exampl, Vermillion Energy stock has crashed by over 21% this year, making it the worst TSX constituent company. 

Similarly, MAG Silver, Precision Drilling, Osisko Mining, Arc Resources, and First Majestic Silver have all plunged by double-digits. Unfortunately, the commodity supercycle that we experienced during the pandemic seems to be ending. As such, these stocks have more downward room to go.

The best TSX index constituents this year are Bausch Health, Ats Corp, Lithium Americas, Blackberry, and Shopify. All these shares have risen by over 30%. Shopify stock has jumped by more than 30% this year. However, the stock plunged this week after the company issued a weak forward guidance.

TSX Composite index forecast

TSX chart by TradingView

Turning to the daily chart, we see that the TSX index has made a comeback from its lowest point in 2022. Along the way, it has formed an inverted head and shoulders pattern, which is usually a bullish sign. It has now settled at the neckline of this pattern. The index also remains above the 50-period moving average.

A closer look shows that the Relative Strength Index (RSI) has formed a bearish divergence pattern. Therefore, I suspect that the index will continue consolidating and then have a bullish breakout in the coming months. This view will only be confirmed if it moves above the key resistance at $21,000.