DELAFIELD, Wis. (Stockpickr) -- I am a trend-following trader.
Basically, trend-following is a trading discipline that consists of following price action in a stock over everything else, including fundamentals. Trends can develop in stocks in multiple ways. For instance, I prefer to buy stocks that are in a strong uptrend and have bullish upside volume flows. That being said, there's another way to trade trends that goes outside the conventional thinking of most trend followers and that is buying technically oversold stocks.
Stocks become oversold for many reasons, but the basic reason that I care about as a trend follower is that there were more sellers than buyers. Sure, this is simplistic, but why make trading any more difficult than it has to be?
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Once a stock becomes oversold, I try to identify when buyers are moving back into the stock for a possible oversold bounce. One way to identify an oversold stock is to follow the relative strength index once it gets near or below 30. Another way is to look for a stock that's had an extended downtrend. Once I find an oversold situation, I start to look for a stock that's forming a bottoming pattern, or stabilizing at a defined level. I then look for above-average upside volume to move back into the name as a key downtrend line or resistance levels are taken out.
Traders have to remember that oversold can always become more oversold. That's why it's important to follow the price action and look for oversold stocks that have a probability--not a guarantee--of changing their trend and potentially spiking higher off depressed levels. These types of trades can yield big gains quickly, but remember that the price action is more important than the simple fact the stock is extremely oversold.
With that in mind, here's a look at five technically oversold stocks that could be setting up for sharp rebounds higher soon.