The week’s most oversold and overbought stocks on the TSX

The S&P/TSX Composite dropped 1.2 per cent in a difficult trading week ending with Thursday’s close. The benchmark stands exactly 1 per cent higher year to date (total return). The index, however, is not officially oversold, according to Relative Strength Index (RSI), although the current reading of 40 is closer to the buy signal of 30 than the overbought RSI sell signal of 70.

There are 26 technically attractive benchmark constituents by RSI this week. The top ten most oversold stocks, in order, are Canfor Corp., Tricon Capital Group Inc., Boralex Inc., Transcontinental Inc., Celestica Inc., Cominar REIT, Premium Brands Holdings Corp., NFI Group Inc., Richelieu Hardware Ltd. and Extendicare Inc.

I picked Dollarama Inc. as the focus stock this week because it’s frequently been widely held among investors.

RSI buy signals have only been moderately successful in finding profitable entry point for Dollarama stock. Over the past 24 months, buy signals have more often signaled a period of stabilization – extended sideways price movement – than imminent rallies. This was the case following buy signals in November 2016 and February of 2018.

More recently, a July 2018 buy signal did forecast a 12-per-cent rally to early September, but Dollarama stock took a horrendous beating shortly thereafter. Another RSI buy signal on Sept. 17 marked only a brief pause in selling pressure before further price weakness occurred.

The stock has been sensitive to the 200-day moving average trend line. The 200-day provided price support in January and March 2017, and during May and June of this year. The trend line formed resistance to further rallies in July 2018 and September 2018.

Dollarama’s fundamental outlook could provide a much more positive story – fundamental research should be part of every investment decision – but the current RSI buy signal is not a reliable indicator in my opinion.

There are seven overbought, technically vulnerable S&P/TSX Composite stocks this week using RSI. Labrador Iron Ore Royalty Co. is the most extended company in the index followed by Enercare Inc., MEG Energy Corp., Cameco Corp., Gibson Energy Inc., Nevsun Resources Ltd. and Torex Gold Resources Inc.

Open this photo in gallery: