TransAlta oversold as TSX burns off froth

The S&P/TSX Composite is back in safer territory according to my favourite technical indicator, Relative Strength Index, after treading water in terms of performance for the second straight week.

The number of oversold, technically attractive stocks has increased by 250 per cent, but unfortunately that still means there's only five of them. Aimia Inc. retakes the dubious honour of most oversold stock in the index, although it was only down 0.22 per cent for the week.

Chemical manufacturer Canexus Corp. is now oversold after a horrible set of quarterly results and the resignation of the CEO caused a 20 per cent decline in the stock. Dundee Corp., Lightstream Resources Ltd., and TransAlta Corp. round out the list of Canadian oversold stocks.

TransAlta is the focus chart of the week. Analysts hate the stock at present – seven out of 13 rate it "sell" and the one-year price target is only 1.7 per cent above current levels.

TransAlta is definitely a case where an investor would need a firm grasp on the fundamentals – homework is required before buying the stock. But, provided the dividend isn't cut further, the 5.7 per cent indicated yield provides some downside protection for a prospective investor willing to wait out the current levels of volatility.

It's a healthy short-term sign for the market that the list of overbought, technically extended stocks has decreased by about half to 18. Major banks, precious metals and energy stocks still dominate.

The usual caveats apply – technical measures like RSI change fast, and while historically they've been helpful at finding entry and exit points, they shouldn't form the sole basis for an investment decision.

All in all, the TSX seems to be receding from exuberant levels and grinding off froth. It shouldn't be long until some compelling opportunities arise.