The S&P/TSX Composite fell 0.6 per cent in the five trading days ending Thursday and remains in technically neutral territory – about half way between overbought and oversold – according to Relative Strength Index.
At nine members, the list of oversold, technically attractive stocks in the benchmark is little changed in size from last week. Open Text Corp remains the most oversold stock in the index despite a positive 2.5 per cent return for the week.
Real estate investment trusts are surprisingly well represented in the oversold list. Crombie REIT, and Cominar REIT are represented and Allied Properties REIT is just barely above the 30 RSI mark that signals oversold levels.
TransAlta Corp is the most widely held member of the oversold list and will be the focus chart for the week. Over the past two years, the buy signal has been effective in finding temporary market bottoms after periods of price weakness. In a few cases – notably February 2014 - the stock failed to rally significantly in the aftermath.
The success stories for the buy signal occurred in June 2013, December 2013 and more recently December 2014 where profitable rallies occurred in the subsequent weeks.
As with a lot of domestic stocks lately, the RSI sell signal of 70 should be taken seriously by traders and investors. Steep stock price drops occurred for TransAlta after sell signals in February 2014, February 2015 and April 2015.
The overbought, technically vulnerable list of S&P/TSX stocks is led by ATS Automation Tooling Systems after a 7.8-per-cent weekly return. Valeant Pharmaceuticals International, Centerra Gold Inc. and Ritchie Brothers Auctioneers are other prominent members of the oversold club where a correction is likely.
Relative Strength Index is widely used in trading circles with a history of successfully identifying effective buy and sell targets for individual stocks. Investors, however, should always complete fundamental research before buying or selling any market instrument.
Follow Scott Barlow on Twitter @SBarlow_ROB.
