The S&P/TSX Composite index had a terrible week, falling 1.7 per cent in the seven days (only four trading sessions) ending with Thursday's close. You'd think this would leave a large number of attractive oversold stocks according to Relative Strength Index.
The list of oversold technically attractive stocks is larger this week at 19 members but the problem is that 16 of them are resource-related businesses and the earnings outlook is too difficult to predict. Profit growth in these cases is largely outside the control of management – subject to the whims of global investors who determine the commodity price.
I warn every week that while technical analysis is widely used and works well for long periods, investors must always include fundamental analysis before purchasing any stock. The resource-heavy oversold list highlights why. It doesn't matter if, for example, an energy stock is oversold if the commodity price heads further south. It won't bounce just because it's technically oversold.
Of the remaining non-resource options I selected Saputo Inc. as the focus chart. The good news in this case is that the RSI buy signal of 30 has worked extremely well in the past 24 months. The stock's oversold reading in June 2013 was followed by a small but significant 9.8-per-cent rally. The next time Saputo was oversold, December of 2013, the stock rallied a much more lucrative 46 per cent. In September 2014, the stock hit the RSI buy signal and this kicked off another profitable rally.
The issue with Saputo stock is that the RSI sell signal of 70 hasn't worked all that well. Saputo has been capable of remaining overbought for considerable periods.
Again, the usual warnings apply – it doesn't matter what day traders tell you, technical analysis should always be accompanied by fundamental analysis.
The list of overbought, technically vulnerable stocks won't take me long to discuss week – there's only one company. Rogers Communications Inc. is the only TSX stock trading above the RSI sell signal of 70 after a difficult week for Canadian investors. Element Financial Corp., Catamaran Corp., Stantec Inc., and Gildan Activewear are just outside of overbought range with RSI levels in the high 60s.
Follow Scott Barlow on Twitter @SBarlow_ROB.
