Glossary
Oversold
A reading that price has fallen far and fast relative to its recent history, flagged by oscillators such as RSI below 30.
Oversold is the mirror image of overbought: a security has dropped so sharply over a short window that a momentum indicator flags the selling as extreme. Traders track it because heavy, fast selling often exhausts itself and is followed by a bounce. The catch is that "extreme" is measured only against the stock's own recent past, so a collapsing stock can stay oversold for a long time.
How it is measured
The usual definitions use an Oscillator threshold: RSI (14) below 30, stochastic %K below 20, Williams %R below −80, or a close beneath the lower Bollinger Band.
How it is used
- Mean-reversion setups. In a sideways market, an oversold reading near established Support has historically lined up with short-term rebounds more often than in trending markets.
- Confirmation first. Many traders wait for the indicator to climb back above the threshold, or for a bullish Divergence (price makes a lower low while RSI makes a higher low), before acting.
- Trend filter. In a long Downtrend, oversold readings occur again and again on the way down. A filter such as "only take oversold signals while price is above its 200-day Moving average" removes many of them.
What to watch for
An oversold reading is not a statement that a stock is cheap. A company that just reported a fraud or a failed drug trial will read deeply oversold for good reason. Readings driven by news also tend to behave differently from those caused by ordinary selling pressure, and a quick rebound that fades is common enough to have its own name, the Dead Cat Bounce.