The S&P/TSX Composite was almost exactly flat for the five trading days ending with Thursday's close – it was actually higher by four thousandths of a percentage point. The benchmark remains in neutral territory, technically speaking, with a Relative strength Index (RSI) reading of 43 that is closer to the oversold buy signal of 30 than the RSI sell signal of 70.
The list of TSX Composite stocks trading below the buy signal of 70 is large at 20 members – so much so that the full table would be bigger than space allows. The table below is a select list based primarily on market cap.
The focus chart this week, however, is not on the oversold list. Following the advice of J.C. Parets, the market technician at All Star Charts, we're going to ignore oversold companies trading below their 200-day moving average. Mr. Parets believes that rallies for oversold stocks are far less likely when they are mired in a downtrend below the 200 day moving average. None of the officially oversold stocks by RSI this week are trading above these levels.
Rogers Communications Inc. is a company trading above its 200-day moving average and also close to oversold levels according to RSI.
Relative Strength has worked reasonably well in identifying profitable buying opportunities over the past 24 months, but many of the rallies have been short-lived. This was true after buy signals in February and April 2014, and also July and September of that year. RSI buy signals were less effective – actually they didn't work at all – in March and April of 2015.
A near-oversold RSI reading in June 2015 did kick off a sizeable 30-per-cent rally (not including dividends) to late October. There's no doubt that investors were looking for the type of stable earnings stream found in telecom companies as commodity sectors melted down.
Rogers stock is above its 200-day moving average but not by much. Investors should be watching for a test of the 200 day moving average and the stock's reaction. If it knifes through to the downside, that would be a bad sign. If it bounces off the 200-day and moves higher, this would be a highly encouraging sign for investors.
Technical analysis has proven highly effective and is used by most professional money managers. It is not, however, sufficient on its own. Investors and traders should complete fundamental analysis before any market transactions.
Follow Scott Barlow on Twitter @SBarlow_ROB.
