While the market price represents the ultimate arbiter, publicly traded securities don’t run along perfectly linear trajectories. Even some of the most beaten-down enterprises may occasionally see their valuations rise, if only temporarily. To identify such contrarian opportunities, traders often turn to the relative strength index or RSI.
Representing one of the most common gauges within the discipline of technical analysis, the RSI measures the robustness of recent price action. This measurement is then used to determine the sentiment at the time for the asset, whether conditions suggest that it’s overbought or oversold. When the index rises above the 70 level, it’s considered overheated. Below 30, the asset may be oversold.
One of the biggest takeaways is that the RSI is a contrarian indicator. If the RSI is at a relative peak, that might indicate that too much optimism is baked into the price. Subsequently, the target asset could fall. However, the opposite may be true. If the RSI suggests that too many buyers are dumping the asset, it could fly higher.
To be sure, it’s incredibly difficult and time consuming to manually note which market ideas are overbought or oversold. To help speed the process and identify compelling opportunities, speculators can turn to Barchart’s RSI Oversold screener. Simply go to the Barchart Screeners homepage and select the interface.
Recent Success Story Shows the Tool’s Effectiveness
Last week, I first highlighted the utility of the RSI Oversold screener by discussing grocery retailer Grocery Outlet (GO). At the time, the company had recently disclosed a disappointing earnings print along with a downbeat forecast. Naturally, GO stock suffered in the market, triggering an oversold reading. However, that also opened a contrarian trading opportunity.
Back then, I stated the technical justification for betting on GO stock as follows:
For one thing, there’s the idea that the bad news has already been baked into Grocery Outlet. Yes, it did disclose less-than-encouraging news. However, in the absence of additional headwinds, there may not be much of a rational basis to drive GO stock lower. With the rough stuff out of the way, it’s not out of the question for shares to rise.
Further, the huge hit in GO stock is somewhat similar to the Martingale betting system. Outside of aberrant conditions, securities never rise or fall in a straight and unbroken trajectory. At some point, a stock will break its current trend and move in the opposite direction, no matter how briefly. Knowing that, speculators may attempt to “double down” on the dips.
Admittedly, the ride was a wild one. Still, one week after the story was published, GO stock gained 4.9%. So, betting on weakness can be a good idea if you follow the RSI.
Potential Opportunity in GEVO Stock
As for GEVO stock, investors have several reasons to believe that, at least temporarily, it could rise higher from the current weakness. First, we’ve got to talk about the relevance of the business. As a renewable chemicals and advanced biofuels enterprise, Gevo aligns well with the broader discussion on green and sustainable energy infrastructure development.
Second, analysts project significant expansion in the top line. For fiscal 2024, they’re looking at a loss per share of 33 cents on sales of $17.64 million. That’s somewhat of a mixed bag as last year, the company posted a loss of 28 cents on sales of $17.2 million. However, by fiscal 2025, the top line could skyrocket to $31.05 million or up 76% from projected 2024 revenue.
Third, the Wall Street consensus for GEVO stock stands at Moderate Buy. This assessment breaks down as two Strong Buys and two Holds. It’s not the most convincing of endorsements yet we’re also talking about a literal penny stock. You take the wins wherever you can.
Lastly, the mean price target for GEVO stock shoots up to $4.26 per share. That implies 504% upside potential, which is one of the main reasons market gamblers are intrigued by it.
Turning to the RSI, the index sits at a relative low point. Assuming that the bulls can hold onto the psychologically important 70-cent level, it’s not unreasonable for the market to bid up GEVO stock. After all, with so much top-line expansion projected for the business, the pricing is much more attractive.
At the moment, GEVO stock trades at 10X trailing-year revenue. At projected 2025 sales, shares would trade at 5.4X revenue. That’s still high but is much more palatable, presenting an intriguing framework.
Not a Guarantee But a Prospect
To be crystal clear, the RSI Oversold indicator is not a guarantee that the target security will swing higher. Sometimes, a bad business can continue eroding. It’s important to realize that we’re dealing with prospective candidates.
Nevertheless, certain ideas are more promising than others. While GEVO stock is speculative, it also carries enough positives to suggest that a contrarian turnaround is possible. Primarily, it occupies a relevant industry and some analysts are willing to back it. With the RSI pointing to an oversold condition, it might not be a bad idea to throw some pocket change at the alternative energy enterprise.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
