The S&P/ TSX Composite had a strong week, rising 1.1 per cent as of Thursday's market close. The benchmark is in technically neutral territory according to Relative Strength Index (RSI) with a reading of 52 that is about halfway between the buy signal of 30 and the RSI sell signal of 70.
There are only two index constituents trading at oversold levels implying a stock price bounce in the near term – Klondex Mines Ltd. and Element Fleet Management Corp..
I picked Canadian Imperial Bank of Commerce as the focus stock this week despite the fact that it's not quite oversold according to RSI. CIBC's RSI of 35.9 is close enough to oversold to warrant further study in light of its relevance to the market as a whole.
The chart strongly suggests that if CIBC's price falls into the official oversold zone, investors can have a lot of confidence buying the stock. Both RSI and the 200 day moving average have worked extremely well for CIBC stock in the past 24 months.
RSI buy signals in August 2015, January 2016 and November 2016 were followed by significant rallies in the stock price. In the latter case, investors buying CIBC on November 2, 2016 would have realized a 21 per cent profit by March 9 of this year, and that doesn't include dividends.
The 200-day moving average trend line has also been an important indicator for investors. CIBC stock tested the line in June and October 2016 before rallying sharply.
There are 12 S&P/TSX Composite members trading at overbought levels suggesting a temporary pullback could be in the offing. Premium Brands Holdings Corp. remains the most overbought stock in the benchmark followed by BRP Inc. (non-voting shares), Empire Company Ltd., Dollarama Inc., ATCO Ltd. Class I and Amaya Inc.. Rogers Communications Inc. B is the most widely owned overbought stock according to RSI.
Investors should always complete fundamental analysis before buying or selling any asset.
Follow Scott Barlow on Twitter @SBarlow_ROB.
