Defining and filtering oversold stocks

What is an oversold stock

A stock is oversold when it is subject to a persistent downward pressure due to extreme fund outflows. When a security is oversold it is often due for a rebound.

There are two types of oversold stocks, fundamentally oversold stocks, and technically oversold stocks.

The most common fundamental oversold indicator of a stock is the price-earnings ratio. A company’s P/E must be compared to its sector or relevant index, to conclude whether a company is oversold or not. However, to gain an understanding of fundamental analysis and why a fundamental overbought or oversold interpretation may be false check our guide on stock fundamental analysis.

MacroVar oversold indicator

MacroVar monitors all major stock markets for oversold conditions. Values of the MacroVar momentum oscillator lower than –2.5 signify oversold conditions.

It must be noted that the MacroVar oscillator must be compared to the rest of the stock’s quantitative factors and other factors affecting the specific stock.

The MacroVar momentum oscillator is the z-score of the current stock price versus the 1-year stock price. The formula for the MacroVar oscillator is:

MacroVar Oscillator = (Current Price – 250 trading days price simple moving average) / (250 days price standard deviation)

Traders should pay less attention to overbought or oversold conditions during strong trends. They should pay close attention during counter trends and all combined with the RSI.