The S&P/TSX Composite rose 0.9 per cent for the trading week ending with Thursday’s close, and the benchmark is once again bumping up against overbought, technically-vulnerable levels according to Relative Strength Index (RSI). The current RSI of 68.6 is only marginally below the sell signal of 70.
There are only three oversold, attractive index constituents by RSI this week. Fortis Inc, is the most oversold stock in the benchmark followed closely by Dorel Industries B, and Aecon Group Inc.
I picked a stock that’s almost oversold – Bank of Nova Scotia – for the focus chart this week because of its prominence in the market. BNS has an RSI reading of 31.3 that’s not far above the buy signal of 30.
BNS’s price has been sensitive to RSI buy signals but not consistently so. A buy signal in August of 2015, for instance, predicted a significant 7.6-per-cent rally to the end of October but too often, buy signals were followed by tiny rallies before further downside. December 2015 and January 2018 buy signals are good examples of unsuccessful indicators.
The 200-day moving average trend line has been very important for the stock. RSI buy signals are generally less reliable when a stock is below its 200-day moving average and this was the case for BNS in 2015 and 2016. Also, in late October 2015, the trend line appears to have formed resistance to a more extended rally.
In May and September 2017, it looks like the 200-day moving average provided price support, helping prevent further price declines.
It’s important to note that there has rarely, if ever, been a time that buying a domestic bank stock didn’t work out over the longer term. That said, BNS is now well below the trend line and investors looking for a promising entry point will be safer from short-term losses if they wait until the price is sustainably above the 200 day moving average.
As always , investors should complete fundamental analysis before making any market transactions - this column only covers technicals.
There are 17 S&P/TSX Composite members trading in short term vulnerable territory with RSI levels above 70.
WSP Global Inc is the most overbought stock in the benchmark, followed by Valeant Pharmaceuticals International Inc., CAE Inc., Great Canadian Gaming Corp., Morneau Shepell Inc., Transalta Renewables Inc. and Bombardier Inc.
