The S&P/TSX Composite climbed 1.9 per cent for the five days ending with Thursday's close and is now officially overbought and technically vulnerable to a pullback according to the Relative Strength Index (RSI).
The benchmark itself will be the focus chart this week, but I'll first note the small number – three – of benchmark constituent stocks that are trading in oversold, technically attractive territory below the RSI buy signal of 30. Valeant Pharmaceutical International Inc. is the most oversold stock in the S&P/TSX Composite, surprising exactly no one. Performance Sports Group Ltd. is next with an RSI of 29 and last week's focus, Empire Co. Ltd., is the third.
From a technical analysis perspective, the most interesting thing about the S&P/TSX Composite has nothing to do with RSI at all. The equity benchmark has now popped above its 200-day moving average for the first time since June, 2015. If it stays above the green line in the chart, this would suggest the downtrend in the domestic equity market may finally be at an end. As I've discussed previously, technical buy signals work much better when an asset price is trading above its 200-day.
The TSX is at an RSI sell signal at the moment, however, not a buy signal. RSI sell signals were effective in 2015, preceding significant market downdrafts in February and April. Previous to that in 2014, with the benchmark trading in an uptrend well above the 200-day, RSI sell signals weren't much use at all. The TSX either ignored the warning and kept moving higher or merely paused before hitting new highs.
Canadian investors will hope that with the benchmark price now above the trendline, the equity market can once again keep moving higher, like in 2014, despite overbought conditions. I would rather wait until there's more distance between the TSX and the 200-day before getting really confident, but things look good at the moment.
The full list of overbought, technically vulnerable TSX stocks is too big to fit on this page at 42 members. I've winnowed it down by removing stocks that are less widely held. REITs and banks – the more credit-related market sectors – dominate the overbought list. Cominar REIT is the most overbought stock in the benchmark and Riocan REIT and CanREIT are close behind. Banks are represented by National Bank, Bank of Nova Scotia, CIBC and Royal Bank, Bank of Montreal and TD. So, all of them pretty much.
The usual caveats apply again this week. Technical analysis is a wonderful tool but not enough, on its own, to justify market transactions. Fundamental research must always accompany technical before assets are bought or sold.
Follow Scott Barlow on Twitter @SBarlow_ROB.
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