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The S&P/TSX Composite rose 0.5 per cent for the trading week ending with Thursday's close and stands 5.8 per cent higher for the year.
Recent strong performance has pushed the domestic benchmark into overbought, frothy territory according to Relative Strength Index (RSI). The current RSI reading of 70.5 is above the RSI sell signal of 70.
Corus Entertainment Inc. is the most oversold, technically attractive stock this week with an RSI of 22.5 that is well below the buy signal of 30. The stock has, however, failed to rally after buy signals in the past. The remainder of the oversold list is dominated by the energy sector as it includes Advantage Oil and Gas Ltd., Paramount Resources Ltd., Parkland Fuel Corp and ARC Resources.
I picked Canadian Pacific Railway Ltd. as the focus stock this week as it's widely held and, with an RSI of 79.9 that's well above the 70 sell signal, as overbought and technically vulnerable as at any point in the past 24 months.
RSI sell signals have effectively predicted price corrections in CP Rail stock in the last two years.
An April 2016 sell signal was followed by a 17.5-per-cent decline to the end of June 2016. Another sell signal in July 2016 forecasted a more moderate 5.0-per-cent fall. Following that, a sell signal in May of this year forecasted a 12.7-per-cent correction.
The record here is relatively clear.
RSI sell signals are to be taken seriously and investors should wait until overbought conditions disappear before adding more CP Rail stock. As always, fundamental research could trump the technical outlook, and investors should complete fundamental research before making any market transactions.
There are 28 overbought index members this week in addition to CP Rail. Prominent names on the list include Royal Bank of Canada, the most overbought stock in the benchmark, Bank of Montreal, National Bank, Toronto-Dominion Bank, Power Financial Corp., Bombardier Inc., and CGI Group Inc..