Stock Of The Day: Is Best Buy About To Reverse?

Best Buy Co., Inc. BBY shares are lower again Friday. This comes after yesterday's drop of almost 18%.

But stocks don't go down forever. Some traders expect a reversal and move up if the stock can hold an important level.

Best Buy is extremely oversold and trading close to support. These dynamics could set the stage for a move higher. This is why our trading team has made it our Stock of the Day.

Most of the time, a stock stays within its normal trading range. But if traders and investors become emotional and sell aggressively, they can push the price below this range. When this happens, the stock is considered to be oversold.

This will get the attention of other traders and investors. Some will enter the market as buyers. They will be expecting a reversion to the mean or a move higher. Their buying could push the price up.

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There are many ways to determine if a stock is oversold. The bottom part of the chart is the Relative Strength Index (RSI). If the blue line is below the horizontal red line, it indicates oversold conditions. As you can see, that's the case now.

Another way to see if something is oversold is the use of Bollinger Bands. The red line on the price chart is one of these bands. It is two standard deviations below the 20-day moving average price.

According to statistics and probability theory, 95% of trading should occur within two standard deviations of the mean. If the stock is below this threshold, it is considered to be oversold. That's the case here.

Best Buy has also dropped to a support level. You can see on the chart, there was support around $59 in late 2023. Now the stock has reached this level again.

There can be support at levels that were previously support. Some people who sold while the shares were at support regretted doing so when the price rallied after. A number of them vowed to eventually buy their shares back if they could at their selling price.

So now that the stock is back to $59, they are placing buy orders. This has created support.

The combination of being oversold while at support can result in a reversal and move higher.

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