We can say that something (i.e. individual asset, entire market, technical indicator) is oversold when its value falls so low that (according to the technical analysis) it’s unlikely to decline even further. Generally, an oversold market is a sign that a rebound is likely to occur. Traders use indicators such as Relative Strength Index (RSI), Stochastic Oscillator, Money Flow Index to identify oversold conditions. For example, one can view a given market as “oversold” if the RSI indicator for this market is below 30.
Is Gold Oversold?
It’s impossible to tell without knowing the situation in which gold is at the moment when this question is asked. One of the things that we focus on in our daily Gold & Silver Trading Alerts is detecting whether gold is oversold, waiting for bullish signals in order to profit from the following rally. Two of our in-house developed indicators aim to flash buy signals in the oversold territory: SP Short Term Gold Stock Indicator and the SP Junior Long Term Indicator.
Does the Oversold Status Always Indicate a Bottom?
Unfortunately, it doesn’t always work, at least not without taking additional factors into account. In fact, it is a very subjective method of technical analysis. A market that is oversold could be in a downtrend, which means, that more often than not it will continue lower. However, oversold conditions accompanied by some other confirmed buy signals may lead to profitable long trades or short trade exits. Overall, paying attention to the status of the market (whether it’s oversold or not) is very useful, but there are many other factors that need to be considered before placing a trade.