Relative Strength Index (RSI), my preferred short-term technical indicator, provided warning of the S&P/TSX Composite's 1.8-per-cent decline in the week ending with Thursday's close. The RSI reading for the benchmark had been butting up against the RSI sell signal of 70 for the past two weeks, a sign of market over-exuberance and froth.
The good news for investors is that RSI changes quickly and the index now shows a reading of 48.6 that is roughly half way between the sell signal of 70 and the oversold, buy signal of 30. This isn't much help in terms of predicting the market's next move, but, at least, it isn't showing danger signs.
There are still relatively few index constituents, five, trading in attractive, oversold RSI territory below 30. Fairfax Financial Holdings Ltd. is the most oversold stock in the benchmark followed by Home Capital Group Inc., Intact Financial Corp., Enerflex Ltd., and Blackberry Ltd.
Home Capital is the focus stock this week, primarily because it's trading above its 200-day moving average. As we've seen, RSI buy signals are far more effective when stocks are not in long term down trends as indicated by the 200-day.
The pattern in the chart once again shows the importance of moving averages. RSI buy signals have successful identified entry points for Home Capital when, as in September 2014, it was above the 200 day. Buy signals didn't work well, or only temporarily, when the stock was below the trend line between August 2014 and February 2016.
Home Capital's stock price is just above the 200-day now, and, for it to be technically interesting at all, it has to stay above that red line on the chart. If it bounces of the line and heads higher, RSI suggests it might be a decent size positive move.
RSI sell signals - readings above 70 - have worked well as warnings for holders of the stock, routinely followed by significant corrections.
As always, investors should complete fundamental analysis before buying any market asset.
The table of overbought, technically vulnerable TSX stocks by RSI is smaller this week as we'd expect after a pullback. Takeout target Manitoba Telecom Services Inc. is the most overbought company followed by Seven Generations Energy Ltd., TMX Group Ltd., Superior Plus Corp., and Bombardier Inc.
Follow Scott Barlow on Twitter @SBarlow_ROB.