Oversold Market Condition

Oversold Definition

An oversold condition can occur in two forms within the stock market: (1) value of the asset is well below the true market value and (2) in technical analysis a drop in the security has pushed an indicator to an extreme level.

Oversold - Fundamental Analysis

An oversold condition within fundamental analysis is normally identified on a longer term basis.  This is because a stock has to reach extreme levels to determine that the stock is oversold.  Many value investors will look for price to earnings ratio to reach historically low levels before declaring a stock is oversold.  Just because an asset is well below its true market value, it does not mean the market is ready to buy the security.  So, looking at a security from the fundamental analysis angle is not a good move for timing the market. 

Oversold - Technical Analysis

Oversold in technical analysis can mean a lot of things to many traders, depending on which technical analysis indicator (oscillator, trend line, etc.) the trader is utilizing.  This form of gauging when a security is due for a bounce is one of the primary methods for active traders to locate buying opportunities in the market. 

Oversold Does Not Mean It Can't Go Lower

Just because a stock is oversold on a fundamental or technical analysis basis, does not mean the stock can't go lower.  Many traders said that the market was oversold when the Dow Jones hit 11,000 during the credit crisis of 2008.  But look at how these oversold stocks went much lower through October.