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Tickers in this Article: NTRI, DIVX, IFLO
One of the most popular tools in active trading is used to predict a shift in a stock's momentum: 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 below 30 suggest that the stock has been pushed to an unjustifiably low level, causing most bullish traders to start looking for a strategic entry position. In most cases, traders will want to confirm the buy signal by using other technical indicators such as the moving average convergence divergence (MACD) to increase the probability that a move higher will actually occur. Let's take a look at a few of stocks that are technically oversold and could be poised to make a move higher.

NutriSystem Inc. (Nasdaq:NTRI) - Taking a look at the daily chart of NTRI, you'll notice that the bears have been in control of the direction for the past several months. Notice how the selling pressure has caused the RSI to fall below the 30 level. Generally speaking, an RSI reading below 30 suggests that a stock is oversold and that it may be a prime candidate for a move higher. Many traders will wait on the sidelines until the indicator is able to cross above the 30 level - a sign that the recent selloff was overextended and that the bulls are starting to step back in. In addition, many traders will want to confirm the short-term buying pressure by watching for a bullish signal to occur on other major indicators. In this case, you'll notice that the MACD is in the process of crossing over its trigger line, which could suggest that the stock has found an influential level of short-term support. Specifically, it is interesting to note that the $12.80 level has propped up the price in the past and traders will use the move off this level to suggest that the stock is forming a base. It wouldn't be surprising to see many bullish traders set their stop losses below the short-term level of support (shown by the horizontal trendline) because it would allow them to be protected from a bounce off the 100-day moving average (pink line), as it has done in the past.


DivX Inc. (Nasdaq:DIVX) - DIVX is another company that has been dominated by bearish price action, which has caused the RSI to fall into oversold territory. As you can see from the chart below, today's price action has caused the RSI to move above the 30 level, which will likely be used by active traders to suggest that the bulls are getting ready to stage a short-term move higher. It is important to note that the long-term direction of the trend is downward, as shown by the 100-day moving average; however, the recent bounce off the $6.50 level suggests that we could see the price move higher over the short run.


I-Flow Corp. (Nasdaq:IFLO) - Taking a look at the chart of IFLO, you'll notice that the stock has been dominated by selling pressure and, as a result, the price has been pushed into oversold territory. The recent cross above the 30 that was notched by the RSI indicator shows signs of short-term buying pressure. It is important to note that many traders will likely remain on the sidelines until the MACD indicator is able to cross above the signal line, which will then be used as confirmation of a move higher.


For more educational articles see:
A Primer On The MACD
Ride The RSI Rollercoaster

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