Selloffs tend to move to extremes. A selloff can be driven by news about an industry or a company specific event which could be something such as an earnings miss. Occasionally, a steep selloff in a stock can occur for no apparent reason. Traders need to remember that the reason behind a selloff is not as important as the fact that the selloff occurred. In the short term, it is common to see stocks revert to the mean which means a steep selloff is often followed by a short-term bounce. Ignoring the possible reasons why, we know that selloffs in three stocks seem to have setup potential short-term buying opportunities.
ConnorsRSI readings below 20 are usually considered oversold. Extremely low readings are relatively rare. This indicator rarely falls below 5. On average, a stock will become this oversold just once or twice a year. Testing shows we should expect a stock to have a ConnorsRSI reading below 5 on just 0.63% of all trading days. This test was completed on approximately 6,000 highly liquid stocks from January 2, 2001 through February 28, 2014 and the results are presented in An Introduction to ConnorsRSI, 2nd Edition, which can be downloaded for free here.
On average, after the ConnorsRSI reading on a stock falls below 5 we have seen a gain of 2.15% over the next five days.
These stocks also have 2-period RSI readings below 1, a confirmation that the stocks are deeply oversold on a short-term basis. In Short Term Trading Strategies That Work, we demonstrated that buying when the 2-period RSI is below 20 has been a profitable strategy.
Now let’s look at the most overbought and oversold stocks (according to ConnorsRSI) heading into trading for September 8, 2014. ConnorsRSI is a proprietary and quantified momentum oscillator developed by Connors Research that indicates the level to which a security is overbought (high values) or oversold (low values).
MANU (Manchester United Ltd) is the most oversold stock with a ConnorsRSI reading of 3.00.
BSJH (Guggenheim BulletShrs2017 HY CorpBd ETF) is the most oversold non-leveraged ETF with a ConnorsRSI reading of 7.33.
SOXS (Direxion Semiconductor Bear 3X Direxion) is the most oversold leveraged ETF with a ConnorsRSI reading of 17.26.
GSVC (Next Innovation Corp) is the most overbought stock with a ConnorsRSI reading of 98.17.
IFN (India Fund) is the most overbought ETF with a ConnorsRSI reading of 96.41.
TradingMarkets Lists provide users pre-populated lists of stocks and ETFs identifying symbols with overbought and oversold ConnorsRSI and Bollinger Bands® readings. The Screener Lists are powered by The TradingMarkets Screener.
All data is as of the end of day on 9/5/2014.