The S&P/TSX Composite Index rose 0.5 per cent for the trading week ending with Thursday's close.
According to Relative Strength Index (RSI), the benchmark, as a whole, is in technically neutral territory. The current RSI reading of 54.7 is roughly midway between the buy signal of 30 and the overbought, technically vulnerable sell signal of 70.
is the most oversold stock in the index this week, and the remainder of the eight member oversold list is dominated by precious metals stocks. Eldorado Gold Corp., Yamana Gold Inc. and First Majestic Silver Corp. are trading with RSIs below the 30 level.
Last week's discussion of Yamana Gold found RSI lacking as a buy-and-sell indicator for bullion stocks, so I chose Allied Properties REIT as the focus chart this week even though the trust is not officially oversold - the RSI reading of 32 is just above the 30 buy signal.
Allied Property's unit price remains above its 200 day moving average and this is an important point in this case. Over the past two years, RSI buy signals have performed much better when the unit price was in an uptrend above the 200 day.
The most successful RSI buy signal on the chart occurred in late September of 2014. A rally of 18 per cent – not including the REIT's significant distribution payments – followed directly afterwards, lasting until April 17, 2017. The success of RSI as a buy signal became mixed after the unit price fell below the 200 day moving average in May of 2015. A small rally followed the buy signal in June 2015 but further buy signals in November and December merely marked brief pauses before the unit price headed lower. Like most stocks in the benchmark, an RSI buy signal in mid-January kicked off a big rally, in this case 35 per cent to the end of July.
This is a case, I think, where it comes down to fundamental analysis. The technical outlook for Allied Property looks reasonably positive, but there hasn't been enough buy signals in the past two years to blindly trust this one. An investor, after completing fundamental research, with a bullish view on the company's outlook can reasonably find this an attractive entry point from a technical perspective.
The overbought, technically vulnerable list of S&P/TSX stocks is still sizeable at 19 members. Parkland Fuel Corp is the most overbought stock in the benchmark, followed by Bank of Nova Scotia, Alimentation Couche-Tard, CIBC and Bombardier are prominent stocks also on the overbought list.
Follow Scott Barlow on Twitter @SBarlow_ROB.
