The S&P/TSX composite dropped 1.1 per cent for the trading week ending with Thursday’s close, and there are more than 40 oversold index stocks according to Relative Strength Index (RSI). The benchmark stands 1.9 per cent higher for the year so far.
The list of oversold stocks in the index – those showing RSI readings below the buy signal of 30 – is dominated by precious metals and energy companies. Kinross Gold Corp., Osisko Gold Royalties Ltd., IAMGOLD Corp., and Agnico Eagle Mines Ltd. are the four most oversold benchmark constituents.
The most oversold energy stocks are Vermilion Energy Inc. and Nuvista Energy Ltd.
Materials and energy stocks do not lend themselves to technical analysis well because moves in commodity prices usually trump technical factors. With this in mind, I picked online gambling company Stars Group Inc. for this week’s focus chart.
RSI buy signals have worked well in uncovering profitable buying opportunities for Stars Group stock in the past 24 months, although this is somewhat to be expected given the strong performance for much of the period.
Stars Group was consistently oversold through October 2016 but only a marginal rally followed (importantly, no major downdraft occurred either). After that, the buy signal in August 2017 predicted a major 52-per-cent rally.
Stars Group has endured a major sell-off in recent weeks, falling 26 per cent from recent highs. The price is now below the 200-day moving average which indicates a possible breakdown in upward trend.
Fundamental research is always important but this is even more the case here. If nothing has changed as far as the company’s future growth, then investors can be reasonably comfortable expecting a price bounce. I would be more optimistic if the price was above the 200-day moving average.
There are 15 overbought, technically vulnerable benchmark stocks according to RSI this week. Enercare is the most overbought company in the index, followed by Parkland Fuel Corp., Winpak Ltd., Ritchie Bros Auctioneers , Extendicare Inc., Rogers Communications Inc (B), Boardwalk REIT and ATS Automation Tooling Systems.
Scott Barlow