Technical traders are always looking for signals that a stock could be due for a change in direction. Given that stocks rarely move in one direction for too long without periodic retracements, a stock that has endured heavy selling pressure and has become “oversold” may be a potential buying opportunity.
RSI Explained
One of the most popular metrics for determining whether a stock is overbought is relative strength index, or RSI. RSI is an oscillator that fluctuates from 0 to 100 based on the magnitude of recent price changes in a stock. RSI can be calculated on any number of different time periods, but the typical period is 14 days.
The formula for calculating RSI is RSI = 100 - [100/1+(average gain/average loss)]. However, all traders need to know is that the lower the RSI, the more oversold a stock is. The higher the RSI the more overbought a stock is considered to be. Typically, traders use 30 (oversold) and 70 (overbought) as potential buy or sell signals.
A stock with an RSI under 30 is a candidate for a technical bounce, at least in the short term.
See Also: 9 Most Overbought Stocks In The S&P 500
Oversold Stocks
The S&P 500 has been mostly flat in the past two weeks, but some stocks have taken big hits in that time. Here are the 10 S&P 500 stock with the lowest RSIs as of Tuesday morning, according to Finviz:
- Ventas, Inc. VTR, 22.8 RSI.
- Public Service Enterprise Group Inc. PEG, 27.1 RSI.
- A. O. Smith Corp AOS, 29.4 RSI.
- Rollins, Inc. ROL, 30.9 RSI.
- Jacobs Engineering Group Inc JEC, 31.4 RSI.
- Dollar Tree, Inc. DLTR, 31.7 RSI.
- F5 Networks, Inc. FFIV, 33.2 RSI.
- Textron Inc. TXT, 33.4 RSI.
- H & R Block Inc HRB, 33.5 RSI.
- Marathon Petroleum Corp MPC, 34.0 RSI.
Benzinga’s Take
RSI can be a useful momentum trading tool, but don’t rely on it for long-term investing. A stock’s RSI can drop from overbought territory to oversold territory in a matter of days, and it should only be used as a short-term trading indicator.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
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