The S&P/ TSX Composite finished more or less flat for the trading week ending with Thursday’s close, easing higher by less than one tenth of a percentage point.
The benchmark remains overbought, according to Relative Strength Index (RSI), with a reading of 70.3 that is just above the RSI sell signal of 70. The index stands 12.1 per cent higher for the year.
The list of technically attractive, oversold stocks trading with RSIs below the buy signal of 30 is led by Uni-Select Inc., but otherwise dominated by forestry stocks. Cascades Inc., Canfor Corp. and West Fraser Timber Co. Ltd. are all there.
I chose Cascades as the focus chart this week, and it’s an interesting one. RSI buy signals have been reasonably successful in uncovering profitable buying opportunities over the past 36 months. In November 2016, a buy signal was followed by a whopping 64-per-cent rally to July of the following year.
The next buy signal in August 2017 didn’t work quite so well – a 14.6-per-cent rally occurred in the next month, but the price headed due south quickly after the short term peak was hit. A November 2017 RSI buy signal was followed by a 29.3-per-cent rally before the end of February 2018.
Two buy signals in April 2018 were ineffective as the price continued lower. Cascades was oversold through October 2018 and the subsequent rally was significant until the price hit the 200-day moving average trend line after which further weakness occurred.
The chart suggests that while Cascades stock could rally from here, resistance from the 200-day moving average could be a problem. Rallies were seemingly halted in March, August and December after the price failed to breach the trend line.
As always, investors should complete fundamental research – which could tell a complete different story than technical analysis - before making any market transactions.
There are 31 overbought, technically vulnerable S&P/TSX Composite members this week. Enerflex Ltd. is the frothiest stock in the index according to RSI, followed by Altagas Ltd., Descartes Systems Group, Cogeco Communications Inc. and Power Corp of Canada.