The S&P/TSX Composite provided a 0.8-per-cent return for the week ending with Thursday's close, and, according to my favoured short-term technical indicator, Relative Strength Index (RSI), the domestic benchmark remains close to the overbought, technically vulnerable territory with an RSI reading of 64.6 (the sell signal is 70).
Like last week, there's not much to choose from in terms of index constituents trading with oversold, technically attractive RSI readings suggesting an imminent stock price bounce. There is only one stock trading in official overbought territory with RSIs below the 30 buy signal, Extendicare Inc. But, Extendicare stock's price remains well below its 200 day moving average which means RSI buy signals are less reliable.
I picked Fairfax Financial Holdings Inc. for the focus chart this week almost entirely because it's widely held. The stock is also trading below the 200-day moving average, although not by much, so we'll have to take any conclusions from the chart with a grain of salt. With an RSI of 37, Fairfax stock is not quite in oversold territory.
RSI has worked well as a buy signal for Fairfax in the past 24 months. An oversold reading in May of 2015 accompanies the end of a sharp sell-off and an eventual small rally a few weeks later. The oversold signal in September 2015 worked really well as the stock rallied 37 per cent to February 2016. More recently, an RSI of 26 in May of this year presaged a smaller 6.2-per-cent rally.
Fairfax Financial is not yet oversold in RSI terms. It would be very bullish for the stock to push above its 200-day, but past history shows that if it does hit officially oversold levels, investors can be reasonably confident in at least stock price stability.
The usual caveat applies. Technical analysis has proven useful, but must always be accompanied and supported with fundamental research before any buy or sell decisions are made.
The list of overbought, technically vulnerable stocks this week has 14 members, led by Ritchie Brothers Auctioneers. Energy stocks make up the bulk of the list with Baytex Energy Corp., Veresen Inc., Gran Tierra Energy Inc. and Canadian Energy Services represented.
Follow Scott Barlow on Twitter @SBarlow_ROB.
