One of the most popular tools in technical analysis that is used to predict a shift in a stock's direction is known as the relative strength index (RSI). This indicator's primary purpose is to determine when a given rally is becoming overbought or oversold. Generally speaking, readings near 30 suggest that the stock has been pushed down to an unjustifiably low level, causing most bullish traders to start looking for a good entry position. Given the broad market weakness, it is not surprising that there are many companies trading with low RSI values. However, what you may find interesting is how hard shipping industry stocks have been hit. We believe that many investors will start turning their attention to the bigger players in the shipping markets because this group is currently trading near bargain-basement prices based on their extremely oversold RSI readings. In most cases, traders will use other technical indicators in combination with an extreme RSI value to increase the probability that a move higher will actually occur. Let's take a look at four stocks that have recently been trading in oversold territory.
|Company||Market Cap||RSI Value|
|Diana Shipping Inc.(NYSE:DSX)||1.09B||30.66|
|General Maritime Corp.
As you can see from the daily chart of General Maritime Corp. (NYSE:GMR), the price of the company's shares have dropped sharply since it moved below the support of the $20 level. The chart clearly shows that the bears are in control of the longer-term direction, but it wouldn't be surprising to see buyers start to step in when the RSI is near 30. Low RSI readings are used by active traders to suggest that the recent selling pressure is becoming exhausted and that the direction is setting up to reverse over the short run. The weakening global economy has made it difficult for companies such as the ones listed in the table to do business and, as a result, share prices of the major shippers have dropped into oversold territory. It looks like we are nearing a bottom and that a bounce may be in store for this group of companies. When looking at the charts, you'll notice that they are all eerily similar to General Maritime (shown below) and when buyers do return, these stocks will likely all move upward in tandem.
Add Your Two Cents
What do you think will happen to the shipping companies? Will they continue to fall victim to the weakening economic environment, or will the low RSI values trigger a bounce? Be sure to join me (CaseyMurphy) in the Free Stock Picking Community to share your thoughts and to see what other investors are saying.
For further reading on the RSI, see Ride The RSI Rollercoaster and Exploring Oscillators and Indicators: RSI.