The S&P/TSX Composite climbed 0.5 per cent for the trading week ending with Thursday’s close, and the benchmark now stands 6.9 per cent higher for 2019, almost erasing the loss in 2018.
In technical terms, the index remains at the higher end of the neutral range with a reading of 65 that is between the Relative Strength Index (RSI) buy signal of 30 and the overbought sell signal of 70.
There is only one technically attractive oversold benchmark stock, MEG Energy Corp., trading with an RSI below the buy signal of 30 this week. Unfortunately, MEG is a stock specific, investment banking-related case where technical analysis is unlikely to help uncover a profitable entry point.
I chose Bank of Montreal, an overbought technically vulnerable stock, as the focus chart.
BMO’s RSI level is just above the RSI sell signal of 70.
Sell signal have been largely unreliable in identifying price corrections for BMO stock – rallies continued after sell signals in December 2016, October 2017 and May 2018 - but I think it’s a very important chart because of the 200-day moving average trend line.
The stock price fell below the trend line in October 2018 during a period when domestic bank stocks underperformed (for reasons that remain largely unexplained). In BMO’s case, the price bottomed on December 24, and has recovered 12 per cent.
The price has been sensitive to the 200-day moving average in the past 36 months, notably in the January-February 2016, May to August 2017 and February to April 2018 time frames. The late October to early December portion of the chart is open to interpretation, but one credible reading is that the trend line was acting as resistance to a rally.
BMO is now trading just below the 200-day average and its reaction if it reaches the line will be interesting. If the trend line acts as resistance, and the price heads lower, this would suggest further weak returns for BMO, and by extension for the sector as a whole. A move significantly and sustainably above the line would be a very positive sign for future returns.
There are 14 S&P/TSX Composite stocks joining BMO on the overbought list this week. Alacer Gold Corp. is the most overbought stock in the index, followed by Restaurant Brands International, Intertape Polymer Group Inc., Canadian Utilities Ltd. and Canopy Growth Corp.
This column is solely concerned with technical analysis, but investors should always complete fundamental research before any market transactions.