Time to go shopping for small-cap energy stocks

Market volatility has given us a lot more than usual to talk about in this week's technical report, as investors might expect. The S&P/TSX Composite Index fell 0.35 per cent over the past five sessions, a low number that understates choppy market conditions. The benchmark's current Relative Strength Index reading of 56 isn't telling us much – it's in the middle of the range between the RSI buy signal of 30 and the sell signal of 70.

The small and mid cap names of the energy sector dominate the list of oversold TSX stocks after getting smashed yet again this week. Offshore services company Horizon North Logistics Inc. is the most oversold stock in the index after falling 15.8 per cent. Birchcliff Energy Ltd., Penn West Petroleum Ltd, Bellatrix Exploration Ltd. and Bonavista Energy Corp. joined Horizon North among the ten most oversold companies.

Outside of energy, MacDonald Dettwiler & Associates and Celestica Inc. are also among the list of oversold stocks.

Birchcliff Energy is the focus chart for the week, less as a recommendation than an example of the extreme levels of volatility in the small cap energy sector.

Birchcliff's current RSI roughly matches the level of last summer. The stock bottomed there, but didn't do much of anything before beginning a rally in January 2014. The stock then spent a long time in the nosebleed section of the overbought list in May and June this year before falling hard.

Technical analysis suggests all of these stocks are poised for a bounce-back, but in the short term, the energy stocks will be at the mercy of a falling WTI crude price. Strong-ish U.S. employment data Friday may help put a bottom in crude, however.

Investors dove towards food stocks in an effort to dodge volatility this week, pushing Weston Ltd., Saputo Inc. and Loblaw Co. into overbought territory. Financials also did well, as Great-West Lifeco Inc. continues a strong recovery from oversold conditions and National Bank of Canada joined the ranks of overbought stocks after a 1.1 per cent appreciation.

Fundamental research is always required before buying any investment and if it were me, I'd be shopping for bargains in the mid cap energy sector – companies with strong growth prospects that were thrown out with the bathwater during recent volatility.

Follow Scott Barlow on Twitter @SBarlow_ROB.