The S&P/TSX index has come under intense pressure in the past few weeks amid challenges in the banking and commodities sector. The index, which tracks the biggest Canadian companies like Royal Bank of Canada (RBC), TD Bank, and Canadian National Railway, has plummeted by over 6% from its highest point this year.
Canadian bank stocks retreat
The main catalyst for the TSX index has been the weak performance of Canadian banks, which are its biggest constituents. RBC stock price has slipped by over 8% from its highest point this year while TD Bank has slipped by more than 17%.
Investors believe that TD is in a worse shape than RBC because of its exposure in the United States. It is nearing its bear market, which happens when an asset drops by 20% from its highest point. Further, Bank of Nova Scotia has moved into a correction zone after dropping by 11% from its highest level this year.
Like TD Bank, Bank of Montreal, popularly known as BMO, has dropped by 17% from the highest point this year. BMO has a large presence in the United States.
The sell-off in TSX banks has been partially offset by gold and silver mining stocks. As I wrote here, gold price has made a remarkable comeback as investors have moved to its safety. Canada is home to some of the biggest gold mining companies Agnico-Eagle Mines, Barrick Gold, Yamana Gold, and Endeavor Mining Corporation.
Barrick Gold stock has soared to $25, the highest point since February 3rd, and ~16% above the lowest point this month. Other gold mining stocks have helped to cushion the S&P/TSX index.
The next key catalyst for the TSX index will be the upcoming Canada consumer price index (CPI) data scheduled for Tuesday. These numbers are expected to show that inflation remained sticky in February.
S&P/TSX index analysis
TSX chart by TradingView
The 4H chart shows that the TSX index has been in a strong downward trend in the past few days. This drop has seen it drop from the year-to-date high of $20,846 to a low of $19,181. It has moved below the 25-day and 50-day moving averages.
A closer look shows that the index has formed what looks like a bearish pennant pattern. In price action analysis, this pattern is usually a bearish sign. Therefore, there is a likelihood that the S&P/TSX composite index will continue falling, with the next reference point being at $18,500.
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