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Friday, July 26, 2013 9:53:31 AM
So what then is “oversold?”
The obvious is the obvious. In order for a stock, or any asset really, to trade, there must always be a seller and a buyer, each of which believe they are getting a good deal (most of the time). You simply cannot sell shares to thin air. Another trader, market marker or specialist, broker, bank, mutual fund, etc. has to purchase the stock being offered for sale.
Common sense therefore indicates that one cannot say that when a stock is “oversold” that “too many shares” were sold.
Following a phase where a stock has seen prices drop substantially in a short time (i.e., prices moving down too far/ too fast), the stock tends to become “oversold”". This stage of the stock normally coincides with a volume surge which is evident that a large number of low-priced shares are being transferred (i.e., distributed) from one group of market participants to another.
Following the surge, which uses up a lot of selling power, the number of those sellers that are still willing to “keep giving away” shares at low (“bargain”) prices becomes exhausted. Sellers are no longer willing to dump their shares at the bid price the stock has reached where the trend becomes vulnerable and begins its reversal up.
This is when buyers move in who are bottom fishing and shorts start to cover.
In short, after a stock has had a long run in one direction, the appearance of a big volume surge means that a large number of shares are being transferred from one group of market participants to another; it is at this point that the market can become “overbought” or “oversold”.
By analyzing how big this volume surge is, how far away is it from a previous reversal point, how prolonged in time it is, you can anticipate when the stock is likely to reverse in the short-, mid-, or long-term.
The advances and declines volume can help see when to make that determination since it shows exactly where the major trading activity is concentrated.
Last updated by Aim High Alerts.
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