The entire S&P/TSX Composite Index is sneaking up on overbought levels as measured by the 14-day relative strength index technical indicator.
The TSX itself is our focus chart for the week, and I've included the 50-day moving average (50DMA) along with RSI. The 50-day has proven an extremely helpful indicator over the past 24 months.
Since May, the domestic equity index has tested the 50DMA three times to the downside (ie. has fallen to, but not through, the green line on the chart) in early May, the end of July and, recently, during the first week of October.
Each time, the TSX has bounced significantly to the upside, rising two per cent between May 6 and May 28, and 3.5 per cent between July 31 and September 18. This month, the index rallied 2.3 per cent after hitting the 50DMA on October 3.
The benchmark's RSI is now at 65.5, approaching the 70 sell signal. The last three times the index breached the RSI sell signal – September 2012, January 2013 and mid-July – its subsequent performance was extremely weak.
The chart provides two lessons for investors. First, that the 50-day moving average has been a reliable indicator of short term TSX performance – although, as always, there's no guarantee this will continue.
Perhaps more importantly, the S&P/TSX Composite is approaching an RSI level that has, in the past, signalled periods of overall market weakness. Market participants with shorter-term time horizons should exercise caution if the RSI for the index rises above 70.
To view the overbought and oversold charts for Oct. 18 on mobile devices, click here:
Oversold: http://bit.ly/1gq95gn
Overbought: http://bit.ly/176CR5X
Scott Barlow