Lupin, Dabur among oversold stocks; analyst explains terminology, strategy

When a stock becomes oversold, it does not automatically mean it is a good time to buy, cautions Pabitro Mukherjee, Deputy Vice President-Research at Bajaj Broking.

Disclaimer: Views and outlook shared on the stock/market belong to the respective analyst/brokerages and are not endorsed by Business Standard. Readers' discretion is advised. With markets under intense selling pressure in recent days owing to heightened US-Iran tensions, and Brent topping the $100-mark, several stocks from the Nifty 500 index have slipped into oversold territory on charts. The NSE Nifty 50 index declined 2.8 per cent or 670 points to 23,410 levels so far in September, while the Nifty 500 dipped 2.3 per cent to 22,915 levels. A technical scan of the Nifty 500 stocks shows that 32 stocks, including prominent ones like HDFC Bank, Asian Paints, Dabur India, Lupin, Maruti Suzuki and UltraTech Cement were trading in the oversold zone, with a RSI reading of 30 or below, on Thursday. 

 

 

 Pabitro Mukherjee, Deputy Vice President-Research at Bajaj Broking explains that the term "Oversold" is used when a stock falls abruptly in a short period. Traders usually use indicators such as the Relative Strength Index (RSI) and Stochastic along with the overall market trend to understand whether the selling has gone too far. "The RSI indicator ranges between 0 and 100; a reading of 30 or below indicates the stock is oversold. Whereas, in the case of the Stochastic Oscillator, a reading below 20 indicates an oversold condition," explains Mukherjee.

What does "Oversold" suggest?

The analyst argues that oversold conditions often reflect fears and panic among investors. Mukherjee cautions that when a stock becomes oversold, it does not automatically mean it is a good time to buy. "It simply means the stock has fallen sharply, and selling pressure may have become extreme," he adds. 

 

 On one hand, it may seem that an oversold stock is due for a short-term bounce or pullback as short sellers may book profits by buying the stock; on the other hand, an oversold stock may remain weak for a longer time in case of serious issues with the company, such as poor earnings, heavy debt, or bankruptcy concerns. To sum it up, Mukherjee says that an oversold stock may be due for a bounce, but it is not a guaranteed 'Buy' signal. Investors should also look at the company's fundamentals and overall market trend before making a decision. 

How to approach oversold stocks?

 The analyst from Bajaj Broking says that it is important to understand why the stock is "oversold" in the first place. "If the decline is because of a broader market or sector correction, the opportunity may be better. But if the fall is due to fraud, weak earnings, debt problems, or regulatory issues, it is better to stay cautious," says Mukherjee. From a technical perspective, it is important to identify a bullish divergence such as, "The stock is making a new low while the RSI is making a higher low. RSI divergence can be a sign that selling pressure is losing strength," explains the analyst. Additionally, traders should wait for confirmation. "Don't buy simply because the RSI falls below 30. It is better to wait for the RSI to move back above 30 and for the overall price pattern to support buying in the stock," explains Mukherjee. He urges that traders should always keep a stop-loss to limit potential losses.