This article was published more than 6 years ago. Some information may no longer be current.
The S&P/TSX Composite eased higher by 0.4 per cent for the trading week ending with Thursday's close and remains in the frothy, technically vulnerable zone, according to Relative Strength Index (RSI).
The benchmark's current RSI reading of 72.3 is above the sell signal of 70.
There are a surprisingly large number of index constituents, 18, trading at oversold, technically attractive levels below the RSI buy signal of 30. Torex Gold Resources Inc., is the most oversold stock in the benchmark followed by Just Energy Group Inc., Uni-Select Inc., Linamar Corp., Enbridge and Pan American Silver Corp.
I picked Linamar as the focus chart this week as the stock got bludgeoned after reporting weaker than expected quarterly earnings.
RSI buy signals have been successful in identifying profitable entry points for Linamar in the past two years, but these buy signals have been a lot more reliable when the stock price was above the 200 day moving average trend line.
A buy signal in January 2016 didn't work well at all, but another in February 2016 was followed by a 26-per-cent rally. A buy signal in May 2016 was ineffective, but a June signal worked far better as the stock climbed 44 per cent to early December. In 2017, an April RSI buy signal predicted another rally of exactly the same 44 per cent before the stock price slide this week.
Linamar stock is currently right at its 200-day moving average. If the price can hold above this trend line, we can reasonably expect a recovery based on the past 24 months of market action. As always, fundamental research could counteract that view and investors should always complete fundamental research before making any transactions.
There are 36 companies, about 15 per cent of the benchmark, trading at overbought levels according to RSI this week. WSP Global Inc. is the most overbought stock in the S&P/TSX Composite, followed closely by Canopy Growth Corp., Cenovus Energy Inc., Industrial Alliance Insurance, Manulife Financial Corp., and MEG Energy.