A strong sell is a type of stock trading recommendation given by investment analysts for a stock that is expected to dramatically underperform when compared with the average market return and/or return of comparable stocks in the same sector or industry. It is an emphatic negative comment on a stock's prospects.
For this reason, overbought stochastic readings are interpreted as bearish (sell) signals because price momentum is expected to move in the opposite direction. Conversely, oversold readings are considered bullish (buy) signals, anticipating a rise in price momentum.
An oversold market is one that has fallen sharply and is expected to bounce higher. On the other hand, an overbought market has risen sharply and is possibly ripe for a decline.
Oversold is mistakenly viewed by some traders as a buy signal. Instead, it is more of an alert. It lets traders know that an asset is trading in the lower portion of its recent price range, or is trading at a lower fundamental ratio than it typically does. This doesn't mean the asset should be bought.
Oversold Meaning. Oversold stocks are undervalued. Therefore, an impending price bounce is highly likely. When a particular market instrument is sold continuously, investors think the asset's price has hit rock bottom—the asset becomes oversold.
An overbought scenario indicates increased selling pressure and bearish sentiment; oversold conditions indicate buying pressure and bullish sentiment.
Investors using RSI generally stick to a couple of simple rules. First, low RSI levels, typically below 30 (red line), indicate oversold conditions—generating a potential buy signal. Conversely, high RSI levels, typically above 70 (green line), indicate overbought conditions—generating a potential sell signal.
Overbought stocks are overvalued. Such a stock is bought or sold at a price greater than its fair value. Therefore, an impending fall in price is highly likely.
One popular indicator used to gauge whether a stock is oversold is the Relative Strength Index (RSI), with values below 30 suggesting an oversold condition.
The basic idea behind the RSI is to measure how quickly traders are bidding the price of the security up or down. The RSI plots this result on a scale of 0 to 100. Readings below 30 generally indicate that the stock is oversold, while readings above 70 indicate that it is overbought.
An RSI reading above 70 indicates that a stock is in an overbought zone, suggesting that the stock may be trading at a higher price than its intrinsic value. The RSI is a popular momentum oscillator used by traders and investors to analyse a stock's price movement.
This implies that stock may rebound. Some traders, in an attempt to avoid false signals from the RSI, use more extreme RSI values as buy or sell signals, such as RSI readings above 80 to indicate overbought conditions and RSI readings below 20 to indicate oversold conditions.
The RSI plots this result on a scale of 0 to 100. Readings below 30 generally indicate that the stock is oversold, while readings above 70 indicate that it is overbought.
The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals.
Some traders, in an attempt to avoid false signals from the RSI, use more extreme RSI values as buy or sell signals, such as RSI readings above 80 to indicate overbought conditions and RSI readings below 20 to indicate oversold conditions.
RSI is considered overbought when above 70 and oversold when below 30. These traditional levels can also be adjusted if necessary to better fit the security. For example, if a security is repeatedly reaching the overbought level of 70 you may want to adjust this level to 80.
Best RSI Settings for Day Trading Strategies
For many traders, using the RSI indicator in a day trading strategy is very beneficial. The default RSI setting of 14 periods is suitable for most traders, especially for swing traders.
The bullish trend is confirmed to sustain itself and get stronger only when the RSI crosses the mean position of 50 from below. At this point, you should definitely buy. Again for Intraday trading, the overbought, oversold, and mean positions change as per convenience.
An RSI reading of 30 or below indicates an oversold or undervalued condition. Overbought refers to a security that trades at a price level above its true (or intrinsic) value.
The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals. High RSI levels (above 70) generate sell signals.
Traditionally the RSI is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend.
Overbought or Oversold
Generally, when the RSI indicator crosses 30 on the RSI chart, it is a bullish sign and when it crosses 70, it is a bearish sign.