The TSX is well into overbought territory

This week's technical outlook should allow domestic investors to get outside and enjoy the summer, content in the knowledge that the equity market is extended and more likely to head lower than higher in the next few trading sessions.

The S&P/TSX Composite climbed 1.2 per cent Thursday to Thursday and, according to Relative Strength Index, is now well into overbought territory.

I'd love to provide details on oversold stocks poised for a bounce, but there aren't any. Of the 251 stocks in the benchmark, not one has an RSI reading below the 30 level that suggests it is oversold.

No obvious buying opportunities leads to the benchmark itself as our focus chart of the week. The S&P/TSX Composite has an RSI of 72, two points above the sell signal, but not as frothy as the mid-June reading of 78. The correction after the June overbought reading was relatively sedate at about 1.0 per cent.

The market correction that followed the January 2014 overbought reading was a bit more severe. The TSX hit 76 on the RSI scale on January 20, and proceeded to fall back 3.6 per cent in the following ten days.

This week's list of overbought, poised for a pullback stocks has ballooned from last week's 10 members to 32. Industrial Alliance Insurance is now the most technically extended stock in the benchmark after a 4.7 per cent appreciation.

Industrial Alliance is a good example of how RSI can (but is not guaranteed to) generate trading profits. Industrial Alliance hit the RSI buy signal at the end of May when the stock went ex-dividend and was trading in the $41.50 range. It has jumped to $49 as of Thursday's close. Investors – or more accurately, traders – who bought the stock when it was oversold and now sell when it's overbought, will generate a return in the 15 to 18 per cent range.

There's no general sector trends in the overbought list – it's a mixed bag of financials, precious metals, energy, dairy products and BlackBerry Inc.

Investors should not be lulled into complacency by the Industrial Alliance example – RSI can be an effective tool to identify entry and exit points for stocks, but it doesn't always work.

Fundamental analysis must be added to technicals. Investors buying a stock because it's oversold must be comfortable getting stuck with it as an investment longer term if it fails to bounce.

Follow Scott Barlow on Twitter @SBarlow_ROB.