Oversold and pullbacks
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Mean reversion is the idea that a stock stretched far from its usual range tends to drift back. These recipes find stocks that have sold off hard, leaders taking a breather and candles where sellers ran out of steam.
A low reading says a move was steep. It doesn't say the move is over. Each recipe adds a second condition to cut the noise, and the chart does the rest.
Recipes
Low RSI
Stocks with a 14-day RSI below 33.33, the lower third of the RSI range: names that have fallen far and fast.
Filters
- RSI(c,14)<33.33
- How to use it
Open the charts and separate a stock in a long downtrend from one that dropped suddenly from an uptrend. They behave differently.
- Warning
RSI can stay low for weeks in a stock that keeps falling. A low reading alone is not a bottom.
The Big Dippers
Large caps worth $10B or more in an uptrend, with relative strength of 80 or more, whose RSI has cooled to between 30 and 50 on a recent volume spike.
Filters
- Market cap≥$10B
- RSI(14)between30 and 50
- SMA(50)>SMA(200)
- Relative volume(20)>1 (within 3 bars)
- Relative strength vs market≥80
- How to use it
Check how deep the pullback goes against the stock's recent range, and whether it has reached its 50-day average.
- Warning
A dip in a leader can be a pause or the start of a reversal. The volume spike shows attention, not which side won.
Hammer Reversal
A hammer candle in the last 8 bars, with RSI below 40, in stocks trading over $5M a day. A hammer has a small body and a long lower wick: sellers pushed price down, and buyers brought it back.
Filters
- RSI(c,14)<40
- SMA(bar_dollar_volume,50)>5M
- Daily Hammer candlestick pattern within the last 8 bars
- How to use it
Look at the bar after the hammer. A close above the hammer's high is what most candlestick traders wait for.
- Warning
One candle is one session. In a strong downtrend, hammers print and fail often.
Morning Star
A completed morning star in the last 5 bars, with RSI below 45, in stocks trading over $5M a day: a down candle, a small stalling candle, then an up candle.
Filters
- RSI(c,14)<45
- SMA(bar_dollar_volume,50)>5M
- Daily Morningstar candlestick pattern within the last 5 bars
- How to use it
Check the third candle. The further it closes into the first candle's body, the stronger the pattern reads.
- Warning
The pattern takes three sessions, so by the time it completes, part of the bounce has already happened.
Dragonfly Doji
A dragonfly doji in the last 5 bars, with RSI below 40, in stocks trading over $5M a day. The session sold off and recovered all of it, closing near the open.
Filters
- RSI(c,14)<40
- SMA(bar_dollar_volume,50)>5M
- Daily Dragonflydoji candlestick pattern within the last 5 bars
- How to use it
Mark the low of the doji on the chart. That low is the level buyers defended.
- Warning
A doji shows a stalemate. On its own it says less than the candles that follow it.
Bullish Engulfing
A bullish engulfing pattern in the last 3 bars, with RSI below 50, in stocks trading over $5M a day: an up candle whose body covers the whole body of the down candle before it.
Filters
- RSI(c,14)<50
- SMA(bar_dollar_volume,50)>5M
- Daily bullish Engulfing candlestick pattern within the last 3 bars
- How to use it
Check the volume on the engulfing bar. A large bar on light volume reads weaker than the same bar on heavy volume.
- Warning
With RSI under 50, many matches sit mid-range, not at a low. Look for the decline it is meant to reverse.
Quick reference
Tips
- Pair Low RSI with a trend filter such as SMA(50)>SMA(200) to keep only oversold stocks in an uptrend.
- Candlestick presets read the daily chart on Free. Super and Super Pro can switch a candlestick filter to another timeframe.
- Turn a recipe around: Overbought and bearish setups uses the same patterns at the top of a move.