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.
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….CLICK for complete article