Technical analysis becomes more useful in volatile markets like now, when sentiment dominates and fundamentals are temporarily ignored. That said, I want to reiterate a warning regarding my favoured technical indicator, Relative Strength Index. The RSI measure has been working well, but investors need to remember that it's based on a very small performance sample of 14 days. This means change can happen extremely rapidly – a stock can be massively oversold one day and then overbought three days later.
The S&P/TSX Composite fell 0.8 per cent in the five trading sessions ending with Thursday's close, a pull-back from the previous week's five-per-cent-plus improvement. The domestic benchmark was closing in on overbought levels but is now firmly in neutral territory between the RSI buy signal of 30 and the 70 sell signal.
The list of oversold, technically attractive stocks is dominated by energy and mining-related stocks that I personally have no interest in trading, never mind investing, in such volatile markets. With some trepidation, I picked AutoCanada Inc. as the focus chart this week, in hopes that a 3.1 per cent indicated dividend yield and high expectations from analysts will provide some support for the stock price. But, anyone playing this stock needs a high risk tolerance, and a finger hovering over the "Sell" button, for the next few days.
AutoCanada has traded in an enormous $20 to $90 range in the past 24 months. An RSI "Buy" signal in January 2014 worked ridiculously well. Another "Buy" signal in September 2014 marked a $20 per share rally but any shareholder who didn't sell in early November 2014 took a hellacious beating. Analysts remain extremely bullish on the stock – the 12-month target price of $73 implies a 130 per cent return.
This week's list of overbought, technically vulnerable stocks is primarily the usual suspects – real estate investment trusts, utilities and grocery stores – where investors hide out during periods of market volatility.
The fertilizer stocks are an exception, as both Agrium Inc. and Potash Crop. popped on to the list. They are not, however, dangerously oversold at this point.
The usual disclaimers apply; technical analysis is widely used because it often works, but investors should always include fundamental analysis as part of every market-related decision.
Follow Scott Barlow on Twitter @SBarlow_ROB.
