The S&P/TSX composite index had a difficult trading week, falling 0.8 per cent to Thursday's close. In terms of technical analysis, the benchmark is drifting towards oversold with a Relative Strength Index (RSI) reading of 37 that is much closer to the RSI buy signal of 30 than the overbought sell signal of 70. The index is also trading well below its 200-day moving average of 15,285, indicating a significant downtrend.
There are 20 oversold, technically attractive benchmark constituents this week led by Tahoe Resources Inc. and Jean Coutu Group Inc. Prominent energy names abound on the list with MEG Energy Corp., Suncor Energy Inc., Crescent Point Energy Corp., and Husky Energy Inc. also represented. REITs are also present on the oversold list as Canadian REIT remains oversold and is joined by H&R REIT.
I picked Descartes Systems Group as the focus stock this week. We won't be talking fundamentals here (although investors should always complete fundamental research in addition to technical before making any transactions) but I was struck by the big difference between the trailing price earnings ratio of 66 and the forward price earnings of 22. This means analysts expect a huge jump in earnings.
Descartes has rarely been oversold in the past two years and that's a good and bad thing. It's positive in the sense that performance has been consistent – the price has avoided significant downdrafts. The downside is that there's not much of a track record for RSI buy signals.
The last RSI buy signal for Descartes was in February, 2016. This would have been a great time to buy the stock in the low $21 range as it hit a peak of just under $34 in early June, 2017. Descartes has managed to stay above its 200-day moving average trend line for the past 12 months although recent weakness has the price testing the line now.
On the whole, the current RSI buy signal looks reliable as long as the price remains above the 200-day moving average. This view, of course, must be verified by fundamental analysis.
There are only two overbought, technically vulnerable S&P/TSX composite members this week – WestJet Airlines Ltd. and Air Canada.