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What are we looking for?

Canadian consumer discretionary and consumer staple stocks that have long-term upside potential, based on four technical indicators.

The screen

We limited our pool to the consumer discretionary and consumer staple stocks in the S&P/TSX composite index.

To find the most promising, we looked at each stock's moving average. This is the average closing price for the stock over a recent period, usually both the past 10 weeks (10wMA) and past 40 weeks (40wMA). Charting the moving average week by week gives us a sense of whether investors are growing more (or less) enthusiastic about the company's outlook and whether they are more (or less) likely to purchase the stock.

Technical analysts pay considerable attention to moving averages, because the beginning of an uptrend in a stock is generally signalled when the short-term moving average (10wMA) crosses above a rising longer-term average (40wMA). This is often called a "golden cross."

We started by selecting only those that are above both their 40wMAs and 10wMAs. We then narrowed our search by choosing only the ones with positive stochastic and on-balance volume (OBV) indicators.

The stochastic indicator measures investors' activity. It looks at today's share price range (defined as today's high minus today's low) and compares it with the average range of the previous five days. A positive signal is generated whenever today's range is higher than the previous five-day's average. This suggests that buyers are willing to pay more for the stock than they did during the last five days and shows a positive trend.

On-balance volume (OBV) is used to detect momentum. Volume should keep pace with price; each $1 rise in price should be accompanied by a commensurate increase in volume. A rise in price on lesser volume would suggest a negative signal for the stock.

What did we find?

We found four stocks that satisfy all these criteria and nine that had three positive readings, but a neutral or negative stochastic, suggesting a possible small correction before the resumption of their up-trend. In the adjoining table we summarize our findings. As usual, do your own research before buying any of the stocks listed here.

Consumer stocks that have long-term upside potential

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