The S&P/TSX Composite fell 0.8 per cent for the trading week ending with Thursday's close. According to Relative Strength Index (RSI), the benchmark is still in the technically neutral range with a reading of 46 that is a long way from both the RSI sell signal of 70 and the buy signal of 30.
I expected the list of oversold, technically attractive benchmark member stocks to be riddled with oil and gas companies, but that's not the case. Junior energy stocks, like Baxtex Energy Corp. and PrairieSky Royalty Ltd., are just out of buy range.
I picked TMX Group Ltd. for the focus chart. The stock entered technical buy territory after dropping 2.9 per cent in the past week. TMX is down 6.7 per cent year to date.
The utility of RSI in identifying profitable entry points for TMX has been mixed in the past 24 months. A buy signal in May 2015 was followed by a marginal price rally, and a series of buy signals in July and August of the same year didn't really amount to anything good or bad. The stock was massively oversold in mid-December 2015, and this time the RSI buy signal worked extremely well. TMX proceeded to rally 81 per cent from December to August 2016.
TMX's price remains well above the 200-day moving average, which is encouraging. Buy signals have been generally more effective when the stock was above the trend line indicating a longer term uptrend.
The TMX stock price often acts as a leveraged play on the S&P/TSX Composite so to some extent, the outlook for the benchmark and the stock can be intertwined.
Premium Brands Holdings Corp. is the most overbought stock in the benchmark this week, followed by Dominion Diamond Corp., ATCO Ltd., Amaya Inc., Empire Co Ltd. and Sierra Wireless Inc. The broad trend in overbought stocks this week is defensive sectors have performed well recently. In addition to Empire Co., Canadian Properties REIT and Algonquin Power also fall under this umbrella.
Fundamental analysis should accompany all buy or sell transactions in the market, in addition to technical analysis.
Follow Scott Barlow on Twitter @SBarlow_ROB.
