Distracted by the plunging loonie and weak Bank of Canada economic outlook, I was surprised to see that the S&P/TSX composite was actually higher by 3.2 per cent for the five trading days ending with Thursday's close. The benchmark is again in neutral territory according to Relative Strength Index (RSI) – almost exactly halfway between the oversold buy signal of 30 and the overbought sell signal of 70.
Extreme levels of volatility in the energy and precious metals sectors keeps the list of oversold, technically attractive TSX stocks larger than usual at 29 members. I want to avoid both sectors for the focus chart this week – stock performance and, to a large extent future earnings, will be dependent on commodity prices which are beyond the control of management.
WestJet Airlines Ltd. has fallen more than 30 per cent year to date and is deeply oversold according to RSI. Yet analysts remain highly positive on the stock – the average 12-month price target of 14 analysts is $33.77 which would represent a 47-per-cent gain from current levels.
RSI has worked very well in identifying profitable buying opportunities for WestJet. The stock was oversold in July of 2013 and a 38-per-cent rally followed in the next five months. In March, 2014, another oversold reading was followed by a 43-per-cent rally into September.
Past patterns are, as always, no guarantee of future performance. Any trader or investor interested in WestJet must complete considerable fundamental research to ensure that, for instance, the Alberta economy won't continue to limit demand for flights. In addition, the long term track record for airlines is, to say the least, not that positive.
There were no technically extended, overbought stocks last week but there's 11 now. Loblaw Companies Ltd., Telus Corp., Extendicare Inc., and Alimentation Couche-Tard are among the prominent names on the list.
Follow Scott Barlow on Twitter @SBarlow_ROB.
