The S&P/TSX Composite slid 0.5 per cent for the trading week ending with Thursday’s close, and stands a scant 0.8 per cent for 2018. The benchmark as a whole is approaching oversold levels with a Relative Strength Index (RSI) level of 33 that is close to the buy signal of 30.
There are 18 oversold, technically attractive index constituents this week led by Transcontinental Inc. and Stars Group Inc. Turquoise Hill Resources Inc. and Laurentian Bank of Canada are next on the list followed by a host of precious metals and energy stocks.
I picked Canadian Tire Corp. for the focus chart after it fell 2.6 per cent in the past week. The stock looks like a case where the 200-day moving average determines the reliability of RSI buy signals.
Canadian Tire was enduring a rapid sell-off in the May to August 2017 time frame, so it’s not that concerning that only marginal rallies and further declines occurred after RSI buy signals – it’s generally best to stay out of the way when any stock is falling hard.
A buy signal in February 2018 was far more profitable as the price immediately jumped 10 per cent in the following two weeks. A May 2018 buy signal was also effective as the price climbed 12.2 per cent to early August. Importantly, in both these cases the price was above the 200-day moving average trend line.
The 200-day line has often provided price support in the past two year. Examples include Feb. 3, 2017, June 2017 (briefly and unsuccessfully – further weakness followed) and May 2018 (twice). Unfortunately, Canadian Tire’s stock price is firmly below the trend line now which makes the current RSI buy signal untrustworthy.
Fundamental research may, however, uncover a more bullish story and investors should always complete fundamental analysis before any market transaction.
There are 13 overbought, technically vulnerable benchmark stocks this week according to RSI. Enercare Inc. is the frothiest company in the S&P/TSX Composite followed by Nevsun Resources Ltd., Canadian Apartment REIT, ATS Automation Tooling Systems and Parkland Fuel Corp.