Skip to main content

Six months into a brutal sell-off in the energy sector and still the weekly losses are astounding. Canadian Oil Sands Ltd. fell another 23.8 per cent in the five trading sessions ending Thursday and Penn West Petroleum Ltd. dropped 15.2 per cent. Unsurprisingly, both are deeply oversold according to my favoured technical analysis measure, Relative Strength Index.

The S&P/TSX Composite index fell 1.1 per cent for the period and is technically in neutral territory – almost exactly halfway between overbought and oversold.

The list of oversold, technically attractive stocks remains dominated by the energy sector and I remain reluctant to recommend trading them based on technicals alone. The crude oil price, well outside these companies' control, remains volatile and unpredictable for the short term.

Of the four non-resource names on the oversold list, I picked Canadian Imperial Bank of Commerce as the focus stock of the week. The major banks are rarely oversold for long and historically have offered the best odds for future returns.

RSI has worked extremely well in the past 24 months as a buy signal for CIBC stock. Oversold readings correctly predicted temporary price bottoms and rallies in April and July 2013 and in February and October 2014. Also of note, CIBC can remain above the sell signal of 70 for significant periods, which means traders and investors don't need to have a quick trigger finger on the sell button when the stock is extended.

As always, past patterns are no guarantee of future success, but CIBC look promising at the moment.

REITs currently dominate the over-bought, technically vulnerable list of TSX stocks. Canadian Apartment Properties REIT is the most overbought stock in the index and Allied Properties Real Estate, RioCan Real Estate investment Trust and H&R REIT are close behind.

Agrium Inc. is, for me, the surprise entrant on the overbought list and even though I'd recommend holding off on buying the stock until the froth clears a bit, the recent strength is worth investigating with fundamental research.

The weekly caveats apply: Technical analysis is not enough on its own for buy and sell decisions. Investors should undertake fundamental research before any market action.

Follow Scott Barlow on Twitter @SBarlow_ROB.