Oversold conditions arise when momentum indicators signal that recent selling pressure has been unusually intense, with RSI typically below 30 and Stochastic below 20 being common thresholds. Like overbought, oversold measures velocity of decline rather than whether the stock is cheap in absolute terms. In strong downtrends, stocks can remain oversold for weeks or months as the selling continues, making "buy because it's oversold" one of the most common and costly mistakes in trading. The most useful oversold signals occur at major historical support levels, following parabolic price declines that exhaust sellers quickly, or when accompanied by bullish divergence. Capitulation volume — a dramatic spike in selling volume that then fades rapidly — is often the most reliable real-time indicator that an oversold condition is reaching exhaustion. After genuine capitulation, the majority of willing sellers have already sold, removing the supply overhang.
