The S&P/TSX Composite leapt 2.2 per cent for the trading week ending with Thursday’s close, and the benchmark is now well into the overbought, technically vulnerable range according to Relative Strength Index (RSI).
The RSI level of 72.9 is significantly above the sell signal of 70, and the RSI oversold buy signal of 30 is a distant memory. The index stands 0.60 per cent lower year-to-date.
There are seven oversold, technically attractive index constituents this week, more than I expected in the light of the strong rally.
Altus Group Ltd. is the most oversold stock in the index, followed by WestJet Airlines Ltd., Dorel Industries Class B, Air Canada, Canadian Utilities Ltd., Prometic Life Sciences Inc. and Brookfield Infrastructure Partners.
I chose WestJet as the focus stock this week. The stock is now more oversold than at any point in the past 24 months after falling 30 per cent from its mid-October peak.
RSI buy signals have been only occasionally helpful in finding profitable entry points for Westjet. An October 2016 buy signal was followed by a marginal rally before a steep drop. But the next buy signal in November presaged a reasonable 15-per-cent rally to early January 2017.
A February buy signal was by far the most successful in the past two years, as the stock would eventually rally 32 per cent to October 2017. A January 2018 buy single didn’t work at all, but another in early February of this year was followed by an 11-per-cent rally in the ensuing three weeks.
The track record for buy signals on WestJet stock is too mixed for me to completely trust the current one. The price is so deeply oversold, however, that it’s worth watching for a potential pop to the 200-day moving average. Fundamental research should always accompany technical analysis before any market transactions are implemented.
There are 26 overbought, technically vulnerable stocks in the index by RSI. Nevsun Resources Ltd is the most overbought benchmark company, followed by Great Canadian Gaming Corp., MEG Energy Corp., Canadian Apartment REIT , Alacer Gold Corp., Kirkland Lake Gold Ltd., Celestica Inc., Northland Power Inc., Imperial Oil Ltd. and Parex Resources Inc.