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2 Indicators That Suggest This Railway’s Stock Is Oversold

There are many ways to analyze a stock, including a look at ratios such as price-to-book value or price to earnings, among many others. You could also look at qualitative factors to assess the company’s moat or growth prospects to help determine how it might perform in the future.

Technical analysis looks at overall stock performance and helps to identify patterns in trading; it could help determine if a stock is overbought or oversold. This type of analysis can help an investor get into the market at opportunistic times when a trend is moving in a favourable direction or is due for a correction.

The Relative Strength Index (RSI) is a technical indicator that looks at the average gains and losses for a period of time, typically the last 14 days. The larger the average gains are than the average losses, the higher the RSI number will be. A high RSI number suggests that the stock is overbought (and hence, overvalued). The reverse is true if average losses are higher than average gains, which results in a low RSI number.

An RSI number greater than 70 indicates a stock that has been overbought, and a number less than 30 indicates a stock that has been oversold.

In the case of Canadian National Railway Company (TSX:CNR)(NYSE:CNI), its RSI at the end of last week was at just over 22 — the lowest the figure it’s been at in the past 12 months. The next smallest RSI number was back in November when it was 34, when the stock closed at $83.05 a share. Afterwards, the stock climbed to over $92 before seeing any significant movement down.

Another indicator, the Money Flow Index (MFI) uses a similar calculation to RSI, but it also factors in volumes traded. In CN Rail’s case, MFI is also at a 12-month low, trading at under nine points. The last time it was under 20 was back in November.

Both of these indicators suggest CN Rail’s stock has been oversold. When stocks have been oversold or overbought, that could suggest a market overreaction, and a correction may be around the corner.

CN Rail reported strong Q2 earnings last week, and despite doing so, it has seen its stock decline since the financials were released. One reason for the share decline could be a result of the company taking a cautious outlook and not raising its expectations for the remainder of the year. However, I do not think the recent decline is related to earnings, because the stock has been falling for the past two weeks.

CN Rail has been performing well, and its free fall in stock price doesn’t appear to be justified. For that reason, along with the indicators suggesting the stock has been oversold, I would expect to see a correction upwards in price. However, even if a stock is due for a correction doesn’t mean it will happen imminently. We could still see CN Rail’s stock price dip further, but I believe that at this price point, there is a lot of room and potential for the stock to appreciate in value.

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Fool contributor David Jagielski has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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