Canadian bank stocks are oversold. Time to buy?

Technical analysis – which quantifies investor sentiment using volume and stock prices – is perfectly suited for emotional, volatile markets like the one we have this week. Measures like Relative Strength Index provide actual hard numbers that have historically indicated when a stock is oversold and due for a bounce.

The S&P/TSX Composite has fallen out of the overbought range after a Thursday-to-Thursday decline of 1.4 per cent. The RSI reading is now 53, right in the middle of the neutral range.

I've extended the oversold table this week because bank stocks are becoming interesting. Traders and investors looking for an entry point in the sector should pay close attention to National Bank, Bank of Montreal and Bank of Nova Scotia in the days ahead.

National Bank is the one stock that has an RSI reading under 30 that indicates oversold. BMO and BNS are just above that level at 32.2 and 33.6 respectively. Domestic bank stocks don't get oversold very often, so if they fall below 25, they get tempting.

Bank of Montreal is our focus chart of the week. RSI appears to work really well as a buy signal. In May 2012, November 2012 and May of 2013, BMO stock fell below the 30 level and immediately started to rally. It's not there yet, but will be compelling if it does.

Not surprisingly, the list of overbought, technically extended stocks with RSIs above 70 is much smaller this week. Franco-Nevada looks particularly vulnerable in the short term. As a royalty company, they are a bit immune from precious metals prices, but the ongoing emerging markets sell-off is hugely U.S. dollar positive and will suppress bullion prices. (The greenback-based damage to gold will be offset by a rally in U.S. Treasuries as I explained previously..)

Global markets, equities and debt are in flux right now so it's difficult to step in. I'm looking forward to next week's technical update, however, because I suspect there will be plenty of trading and investment opportunities to choose from as markets stabilize.