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In addition, a horizontal line runs across the chart called the “zero line” (0 line). The main function of the zero line is to alert you to the primary trend of the underlying price action. The RSI tends to remain more static during uptrends than it does during downtrends. This makes sense because the RSI measures gains versus losses.

Negative Economic Reports – Every month, investors get a series of economic reports that provide directional clues to the health of the overall economy. Watch a short video below and see how easy it is to find these stocks, and how quickly it is to add them to watchlist or portfolios. However, if we look at the company’s historic earnings – which were 15x and 10 x, we can see that Company XYZ has a low P/E ratio.

RSI Ranges

In an uptrend, there are more gains, keeping the RSI at higher levels. In a downtrend, on the other hand, the RSI tends to stay at lower levels. The same concept applies in fundamental analysis, where stocks tend to rise after getting substantially overvalued. Indeed, historically, overvalued stocks tend to underperform their undervalued peers.

An overbought level in the financial market can be viewed as the technical version of being overvalued. An overvalued financial asset is one whose real value is not in line with its intrinsic value. Like any index, the Relative Strength Index is only as good as its benchmarks. In this case, investors typically pay attention to the numbers 30 and 70.

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When the market is volatile and the cruel hand of fate deals your portfolio’s best-performers a blow, it’s a natural instinct to wish to sell — and many investors do. However, this could be a unique opportunity to get more stocks at a discount. If you\’re looking to spot an oversold stock as a buying opportunity, then you need to consider the facts yourself, and if you truly believe a stock\’s fall is warranted.

The purpose of RSI is to let you know if a market or stock is overbought or oversold and may reverse. It doesn’t mean that the security will reverse with 100% certainty, but it does indicate it’s in the danger zone. Trend signals that indicate a reversal are called failure swings.

Relative Strength Index (RSI)

When the RSI is high – usually interpreted as the index crossing above 70 – it can signal that the stock is overbought. When the RSI is low – below 30 – the stock may be undersold. Keep in mind that just because MACD generates a buy or sell signal, or that RSI is overbought or oversold, does not mean it is an actionable trade. In addition, it’s essential that you confirm with other indicators before betting real money on a trade. In technical analysis, oscillators are used to make high and low banks that exist between two different extremes.

Therefore, we will only be discussing how to find oversold stocks based on the technical indicators. The oversold stocks listed above are based on the RSI indicator. If you prefer to use the stochastic indicator, simply follow the below steps. Two of the most common charting indicators of overbought or oversold conditions are relative strength index (RSI) and stochastics.

Should Investors Use the Price-to-Earnings (P/E) Ratio in Determining an Oversold Stock?

An oversold period can happen immediately after a financial asset makes a parabolic dip. Such dips happen after a major economic data, earnings, or news event. Similarly, an undervalued situation can happen in a long period of time.

An oversold stock means that a company’s shares are currently under heavy selling pressure but have the potential to bounce back. While the sell-off has caused its share price to decrease dramatically, the new lower price does not reflect the asset’s true value so it’s likely a price rally will follow. Lastly, there are times when a stock, commodity, or market can stay overbought or oversold for a considerable time period before a reversal.

In this article I’ll quickly run over what our scanner looks for, how it determines whether a stock is oversold or overbought and a short tutorial video of how to do it. Once the RSI has crossed back above the 30% line, it’s taken as a bullish signal that how to find oversold stocks the upward trend is gaining momentum. But it’s important to keep monitoring the indicator for any dips back toward oversold territory. The meaning of oversold can have different meanings depending on whether you’re using technical or fundamental analysis.

• Let’s say you have an RSI that’s looking back over the past 14 days of trading, nine of which were bullish and five of which were bearish.
• Not sure how I feel about a pharmaceuticals company, but it does have high short interest.
• When the RSI is high – usually interpreted as the index crossing above 70 – it can signal that the stock is overbought.
• First, you need to identify why an asset’s price has reached such a level.
• Bollinger Bands – these are bands that are plotted one standard deviation above and one standard deviation below a security’s exponential moving average.