Have you ever noticed a stock dipping too low and wondered if it’s a good time to buy? That’s where the Relative Strength Index (RSI) comes in. When a stock’s RSI drops below 30, it usually means it is “oversold,” meaning it might be undervalued and due for a bounce.
In this article, let’s break down how this works in the stock market and see how these stocks actually recover!
Why Stocks Bounce Back After RSI Dips Below 30?
RSI is a tool that measures how fast and how much a stock’s price is changing. It ranges from 0 to 100 and tracks the movement of a stock. Stocks with RSI below 30 tell us the stock has been heavily sold and could be undervalued.
This doesn’t guarantee a rebound, but it’s a popular sign among traders to watch for a potential turnaround. Now, let’s understand how stocks usually bounce back even after their RSI drops below 30:
Temporary Overselling Caused by Market Overreaction
When a stock’s RSI goes below 30, it usually means a lot of people have been selling it. Sometimes, bad news causes investors to panic and sell off a stock, pushing its price and RSI down. This selling is emotional or driven by short-term fear, like negative news or weak quarterly results.
But if the company’s fundamentals are strong, the stock often recovers to a more reasonable price level once the panic subsides.
Value Buying
Big institutional investors look for opportunities to buy quality stocks at discounted prices. When they see a fundamentally strong stock with an RSI below 30, they often see it as a bargain. This surge in demand can quickly reverse the price trend and push the stock back up.
Technical Corrections
Stocks don’t move in straight lines. Traders use RSI along with other technical indicators like moving averages and support levels. When a stock is oversold, many traders anticipate a reversal and place buy orders accordingly. This creates momentum from the trading side, shooting the price upward and boosting the RSI again.
Short Covering Plays a Role
Some traders bet against stocks (called shorting), hoping the price will fall. But when the stock gets too cheap, short sellers close their positions by buying the stock back. This sudden demand from short covering can cause a sharp upward movement, often called a “short squeeze.”
Positive Triggers Turn Sentiment Around
Even if a stock is down, one piece of good news, like a government policy, sector boom, or positive earnings, can flip the investor mood. For example, a budget announcement benefiting the sector or a strong festive-season sales report can trigger investors to start buying.
Retail Investors Rush In
Once a bounce starts and the stock price rises, it attracts retail investors. Many retail investors use RSI-based apps or screeners that show “oversold” signals. This herd movement adds volume to the stock and helps it recover faster than expected.
Key Factors to Consider Before Investing
Now that you know how a stock recovers after its RSI goes below 30, here are a few things you should keep in mind before investing:
Fundamentals Matter
You shouldn’t just buy a stock because its RSI is low. Make sure to conduct a fundamental analysis of stocks by checking the company’s earnings, revenue growth, and debt levels. A low RSI is more meaningful as a company is more likely to recover if its fundamentals are strong.
Industry Trends and Strength
Even if a stock looks cheap, if the whole sector is under stress, it might not bounce back soon. This is why you should always consider the overall health of the industry. For example, a steel company may go down if global steel prices are falling. So, make sure that you keep an eye on industry trends as well.
Market Sentiment
A strong or weak overall market affects how quickly a stock bounces back. If Nifty or Sensex is in a downtrend, recovery might take longer, as even strong stocks might struggle. A bullish market, on the other hand, can lift everything, including oversold stocks.
Conclusion
Stocks with an RSI below 30 can prove to be attractive opportunities, especially if the company’s fundamentals are solid. However, it’s essential to look beyond the RSI and consider other important factors, including company performance, industry health, and market conditions.
By doing so, you can make more informed investment decisions and potentially capitalize on stocks ready for a rebound. Happy investing!
