A couple of weeks ago, an acquaintance told Peter that the stock market had reached ‘oversold’ levels and was unlikely to fall much further. He also advised Peter against panic-selling his holdings.

Curious to know more, Peter decided to discuss this with his friend Paul, a financial market analyst. When they met, Peter exchanged pleasantries before getting straight to the point.

Peter: Hey, is the stock market going to recover?

Paul: Someone appears to be worried about their portfolio.

Peter: Well, someone told me that the market is in some ‘oversold’ territory and so a recovery is bound to happen.

Paul: Well, that’s not a guarantee.

Peter: Why is that? What exactly does ‘oversold’ mean?

Paul: See, we call a market oversold when it drops too fast and too far due to heaving selling by market participants. It can be driven by fear or panic.

Peter: Is there is a way to track this?

Paul: Yes, it can be assessed using technical indicators, predominantly what we call oscillators. 

Peter: What are oscillators?

Paul: There are many indicators used in technical analysis. Each trader/analyst can have their own set of indicators and tools to assess the market. Oscillators are basically indicators that fluctuate around a reference level or within a defined range.

Peter: Can you give me an example?

Paul: Of course. Two commonly-used oscillators are the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).

Peter: Oh! I’ve heard these names. Can you explain a bit more?

Paul: Sure. Take RSI for example. It is based on Relative Strength (RS), which is calculated by dividing average gain by average loss.

Peter: What are those averages?

Paul: Average gain and average loss measure the magnitude of positive and negative price changes over a chosen period. The standard RSI uses 14 periods, usually 14 trading days on a daily chart. It also uses a smoothing method in its calculation.

Peter: Okay. How does RSI indicate whether a market is oversold?

Paul: RSI moves between 0 and 100. A reading below 30 is generally considered oversold. Similarly, a reading above 70 indicates overbought conditions.

Peter: So, if RSI falls below 30, does that mean the market will recover?

Paul: Not necessarily. An oversold market can remain oversold for an extended period. Prices can fall further, particularly during a strong downtrend.

Peter: Then what’s the point of tracking oversold conditions?

Paul: They alert us to the possibility of a recovery. But we should look for other signs, such as a reversal in price action, before drawing conclusions.

Peter: So, oversold doesn’t necessarily mean it’s time to buy?

Paul: Exactly! Oversold is not a guaranteed buy signal. It only suggests that selling pressure has been strong, and the downtrend might lose momentum.

Peter: Can you give an example?

Paul: Of course. Look at Nifty 50. RSI entered oversold territory in mid-September. But then, after a minor recovery, it fell further. RSI, too, inched up and slipped back into oversold region in early October. 

Peter: But it has recovered since then.

Paul: Yes, it has. But this time, it provided us with an additional indication for a possible recovery by forming a morning star candlestick pattern on the weekly chart.

Peter: Got it. So, I shouldn’t assume that a recovery is imminent just because the market is oversold. This can be used in conjunction with other factors to improve the odds of success. 

Paul: Absolutely. That’s why we shouldn’t rely on a single indicator to make investment decisions.

Published on October 31, 2026