In late November, we wrote about the best long and short setups in the TSX 60, and our winners offset those trades that were quickly proven incorrect. In today's environment, we're seeing potential for mean reversion in several areas of Canada's stock market, so we're going to focus on the best reward/risk setups on the long side.
First, let's start with the sectors and indexes to identify the areas of the market in which we're likely to find individual stock ideas.
At the broader-market level, the Equal-Weight TSX 60 is attempting to confirm a failed breakdown and bullish momentum divergence by closing above 135.05, which would signal potential upside toward 143.25.
The Equal-Weight TSX Diversified Bank index has already confirmed its own failed breakdown by closing back above 297, signaling potential upside toward former support near 318.
The Equal-Weight Base Metals Index is also confirming a failed breakdown, suggesting that a rally toward 168.25 is likely if prices remain above 143.25.
Even Industrials, which have fallen nearly 25% since late August, are attempting to rally, but this index needs to close above 1,955 to confirm a potential move up toward 2,085.
Last but not least is Energy, which is finding support at its 2016 lows, suggesting a counter-trend rally toward the 2017 lows of 165 if prices remain above 126.15. No bullish momentum divergence is seen on the index itself, but many individual names in the sector do have significant ones.
While it's clear that there are some mean reversion opportunities at the index level, we know that individual stocks often offer more upside potential than trading the index itself. As a result, we're going to outline the TSX 60 names best suited to take advantage of this mean reversion thesis.
One example is First Quantum Minerals (FM.TO), which is attempting to find its footing at a three-year support level. If prices can get above 10.55 Canadian dollars, that would confirm a failed breakdown and bullish divergence that targets CA$14.00.
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Thanks for reading, and let us know if you have any questions!