Overbought and oversold stocks: 'You were warned'

Relative Strength Index, my preferred technical measure, did a terrific job last week predicting weakness in then-high-flying precious metals and energy stocks. In the past five trading sessions the S&P/TSX Composite index has fallen back 0.4 per cent and the current RSI for the market as a whole is 63, further away from the 70 sell signal.

Last week's technical report warned of a looming correction in a number of precious metals and energy stocks and, unfortunately for shareholders, we saw that this week. Detour Gold Corp for example, had an RSI well beyond the sell signal of 70 last week. This week, Detour shareholders were forced to endure a 6.2 per cent pummelling.

In the energy sector, Calfrac Well Services Ltd. had a 14 day RSI of 77 on Friday, and the stock sold off by 3.5 per cent in the past five trading days.

The overbought list of TSX stocks is down to 14 from over 50 in one short week – a sign of reduced market froth and a reminder of how quickly the technical outlook can change.

Telecommunications stocks are an interesting new addition to the oversold, technically promising list of domestic companies. Bell Aliant Inc., BCE Inc., and Manitoba Telecom Services Inc. are all below the RSI buy signal of 30.

Bell Aliant is the most oversold of the telecoms and it is the focus chart for the week. Analysts don't like it much; the average analyst target price indicates a loss of four per cent in the next 12 months. However, respected telecom analyst Greg MacDonald recently raised his target and rating on the company and, at 6.9 per cent, Bell Aliant is one of the highest-yielding stocks available.

RSI was successful in finding turning points for Bell Aliant stock in February and September 2013. It worked best in February of this year, when a deeply oversold reading of 21 was followed by a 17 per cent rally – and that's not including the dividend.

As always, investors should complete fundamental research before buying any stock. Technical analysis is not enough.

Follow Scott Barlow on Twitter at @SBarlow_ROB.