What are Oversold Stocks 2 Tips to Identify Them

Oversold refers to a stock or the market as a whole that has fallen significantly in price and may be due for a bounce back or an increase in price. This occurs when demand for the stock becomes too low, and there are more sellers than buyers, leading to a lower price. In this blog, we will focus on the meaning of oversold and how to interpret oversold levels in the stock market. Monitor Market dynamics, Economies & Risk across financial assets, countries & business sectors affecting your business or investments.

What Does Oversold Mean in Stocks

In fact, an oversold stock may continue to decline if the underlying conditions that caused it to be oversold in the first place have not changed. When a stock is oversold or overbought it’s not a green light to buy or sell shares. Instead, technical traders are looking for signs of a possible reversal of the prevailing trend. We’ve written before about using divergence in indicators like On Balance Volume to bolster the case for a potential reversal, but remember, the trend is your friend, don’t fight it. When a stock is oversold, analysts mean that its price has gone too far in a negative direction. They base this on both fundamental and technical indicators that suggest that the stock is now trading at a discount to its intrinsic value.

• In fact, we saw it with the QQQs in December, January, June and July.
• Investors who saw the opportunity to buy an oversold stock were rewarded with a 25% gain in just 3 months as the stock price rebounded.
• However, like the P/E ratio, a low P/B ratio should be analyzed in the context of the company’s overall financial health and industry dynamics.
• Sometimes, a stock chart looks more like an Olympic ski slope than a series of asset prices.
• The rebound can be swift, so oversold stocks offer the potential for solid short-term gains.

Another method that may be quite effective is to consider the number of days that a security closes lower. Typically, market players don’t tend to have the perseverance that’s required to push a market down for more than a couple of days, before letting through a small pullback. In the image below you see how the market gets oversold and goes below the lower Bollinger Band, before it finally turns up again.

Oversold: What It Means and How To Interpret Oversold Levels

Otherwise, you risk getting stopped out way too often, which will severely impact your profits. In the image below we see an example of RSI applied to the chart, and how the indicator goes below the 30-threshold. Thus, mean reversion could be said to be a consequence of greed and fear, and how it affects the behavior of market participants. Well, one of the main reasons, is the psychology of market players. Gordon Scott has been an active investor and technical analyst or 20+ years.

Can oversold stocks be a good long-term investment

Evercore EVR was expected to be one of the big winners under the new Trump administration as they specialize in mergers, acquisitions and restructuring advisory services. But the new administration has left many of the tight Biden-era FTC rules in place and Evercore’s stock has faded in alcohol and violence statistics 2025. After hitting an all-time high of $324 following the 2024 US election, the stock had dropped below $190 by March – a more than 40% decline. However, the Evercore selloff may be reaching an end as the RSI triggered an oversold signal on March 11.

Mean reversion tries to capitalize on exaggerated moves by going long when the market has entered into oversold territory, in an attempt to ride the corrective move to the upside. Another way of putting it is that the market is correcting itself after an exaggerated negative move. This type of behavior is typically referred to as mean reversion, and is one of the most popular trading styles among stock traders. Our team has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… Oversold stock refers to stock that is being traded below its usual average metrics – whereas overbought refers to the opposite.

Professional Trading Strategies (Rules, Setup, Backtest, Example Analysis)

• Another indicator used to identify oversold conditions is the moving average convergence divergence (MACD).
• On the other hand, if an investor is taking a longer-term view, they may be more willing to wait out a period of weakness in order to buy the stock at a discount.
• The parabolic stock move wasn’t just a short squeeze either, as the company has grown EPS by 78% over the last five years thanks to sales growth and margin expansion.
• A stochastic value of 100 means that prices during the current period closed at the highest price within the established time frame.
• Factor in the overall market sentiment and any relevant news that may have triggered the stock’s decline.

Technical trading features like overbought and oversold provide plenty of helpful hints but should be part of a comprehensive process. Overbought and oversold stocks are characterized by steep and abrupt price movements, with significant gains or losses occurring in brief periods. The charts of these stocks are easy to identify; the price action is practically vertical, and the volume is mostly going in one direction. Sometimes, a stock chart looks more like an Olympic ski slope than a series of asset prices.

When %K falls below 20 and %D crosses below it, it suggests the stock is oversold, indicating a potential reversal in price. To determine an oversold condition, investors will use both fundamental and technical analysis. Some fundamental metrics that will be used include the price-to-earnings (P/E) ratio, earnings reports and a company’s balance sheet. The stock may continue to decline further, leading to losses for investors who buy too early. The issues impacting the stock may take longer to resolve or may be more serious than originally thought.

Oversold Indicators

Understanding what oversold means in investing and how to interpret oversold levels is an important step for any new investor. Oversold levels can provide valuable information and help investors make informed decisions. However, it’s important to remember that oversold levels are not a guarantee of future price movements and should be used in conjunction with other analysis and research.

You buy a stock when it has been oversold because it is undervalued and the stock will rally on a price bounce. When a stock is overbought, you sell it straight away because a pullback will occur. RSI levels of 80 or above are considered overbought, as this indicates an especially long run of successively higher prices.

Hub Group expects EPS growth of 14% in 2025 and 29% in 2026, a promising outlook. If the company can hit those earnings projections, the stock’s current price could look like quite a bargain. Setting clear entry and exit points, implementing stop-loss orders, and managing position sizing can help limit losses and protect trading capital. Additionally, traders must remain disciplined, control emotions, and adhere to their trading plan even when faced with volatile market conditions. Technical analysts use various indicators, such as the Relative Strength Index (RSI) and the Stochastic Oscillator, to determine if a stock is oversold. These indicators are based on mathematical calculations and can provide a visual representation of the stock’s price and momentum.

What are some of the most successful strategies for investing in oversold stocks

In addition to company-specific fundamentals, macroeconomic data can also play a role in identifying fundamentally oversold forex trader best stocks. However, it’s crucial to remember that fundamental analysis is just one piece of the puzzle. It’s important to note that trading oversold stocks carries risks, as prices can continue to decline despite indications of oversold conditions. Therefore, it is vital to combine technical and fundamental analysis, exercise discipline in trade execution, and adhere to proper risk management principles.

Technical indicators can and do give false signals, especially in volatile markets. Therefore, it’s prudent to use them in conjunction with other forms of analysis, such as fundamental analysis. To compile the list of the 10 most oversold Canadian stocks to buy according to analysts, we used the Finviz stock screener and CNN. Using the screener we aggregated a list of Canadian stocks that have fallen by more than 25% over the past 6 months but analysts see more than 25% upside. We cross-checked the upside potential from CNN and ranked the stocks based on this metric, in ascending order. Additionally, we have included the hedge fund sentiment around each stock.

Identifying such markets, though, is a challenging task, even for advanced traders. Just keep in mind that it’s much easier to go long on oversold levels than to short overbought levels. This has to do with that the positive drive of the stock market, which helps prices to recover from oversold levels, works against you as you’re shorting the market. We recommend that you look for mean reversion strategies mainly on the daily timeframe. In other words, many people are watching the daily timeframe and act on oversold signals that form, instaforex review which helps push prices higher. To mitigate these risks, investors should conduct thorough research and analysis before making a purchase.