S&P 500 analysis: Top 4 oversold stocks to watch

Key takeaways

• S&P 500 has sank to four-month lows following weeks of pressure
• The index has slipped into oversold territory for the first time in over a year
• Some of the most notable names that are deep in oversold territory are those that are highly sensitive to consumer spending, including Block, Coca-Cola, McDonalds and United Airlines.

Stocks RSI: What are oversold stocks?

A stock is regarded as oversold when it has suffered a sharp, rapid decline and markets believe it may have become undervalued as a result, making a contender to rebound. The opposite is overbought, which is when a stock is seen at risk of pulling back following a rapid rally.

The Relative Strength Index, or RSI, is a momentum indicator used in technical analysis that is designed to help provide short-term signals of when to buy and sell. The RSI measures the pace of recent price changes and moves between 0 and 100.

A stock or index is considered oversold when the RSI drops below 30, and overbought when it rises over 70. The idea is that traders can find oversold stocks that could be primed to bottom-out and rebound in the near-future, or overbought stocks that could be about to peak and reverse.

However, not every oversold stock is guaranteed to see its price increase nor is every overbought one certain to fall. Plus, the RSI is just one indicator and is not used in isolation, but part as a broader toolkit. That means it is not recommended to make trading decisions solely based on the RSI, but understanding it can help improve your technical analysis and it does give you a quick snapshot of stocks that may offer a trading opportunity. There are other technical tools that can also be used to identify potentially oversold or overbought stocks, such as stochastics.

S&P 500 outlook: Is the S&P 500 oversold?

The S&P 500 has been under pressure for five consecutive weeks and has slumped to a four-month low as higher for longer interest rates, rising treasury yields and a shaky economic outlook all sap sentiment out of stocks.

The recent selloff means the index has slipped into oversold territory for the first time in over a year. Based on the performance over the past three years, the index could sink deeper into oversold territory before rebounding. More importantly, the S&P 500 has reliably bottomed-out after escaping oversold territory in recent years, leaving scope for the index to remain under pressure in the short-term.

Let’s broaden the technical analysis out.

Bulls are hoping that 4,230 is forming some form of floor as this appears to have held yesterday and is just about holding in early trade today. The 200-day moving average continues to linger and could provide a potential safety net at 4,200. Any recovery would need to see the index rise back above last week’s close of 4,330 before attempting to reclaim the 100-day moving average.

Top oversold stocks to watch

We have filtered through the most oversold US stocks based on their RSI reading and picked out five of the biggest and most notable names to watch -  payments firm Block, drinks giant Coca-Cola, fast-food chain McDonalds, and United Airlines. All of them are feeling the heat as markets readjust to a higher for longer interest rate environment and fret about a cooldown in consumer spending.

SQ stock: Block stock chopped

Block is sliding because of concerns that lower consumer spending could hurt payments companies, but it has additional problems too – such as the ongoing attack from short seller Hindenburg Research, which has soured sentiment and contributed to the fall in share price since it released its report back in March. Plus, Square CEO Alyssa Henry has just left after nine years with the business and that has heightened pressure on Block chairman Jack Dorsey to address an outlook plagued by slower growth.

Block shares are the most oversold they have ever been since it went public in 2015, according to the RSI. With Block shares and three-and-a-half year lows, it is hard to squeeze the chart in, but we can see that it is not far from testing the lows we saw when the pandemic derailed markets back in March 2021, which suggests it could fall to as low as $32 to $37 before finding a floor if it remains under pressure.

The immediate upside goal would be to move back above $45 before attempting a larger jump over $54 to reclaim the floor that held throughout most of 2023.

Brokers have been slashing their target price on Block in recent weeks, but they still see significant upside potential from here. That suggests Wall Street thinks the selloff has indeed been overdone.

KO stock: Has Coca-Cola lost its sparkle?

Coca-Cola shares have lost ground in seven of the last eight sessions and have plunged to a one-year low, and the RSI suggests the stock has not been this oversold since 2004! That has caused its valuation multiple to drop below its historic average and it is now trading at a discount to the industry average.

The RSI and the sheer sharpness of the recent decline suggests it could be approaching a bottom and the move higher today will be providing hope to the bulls. A close above $55 would recapture the brief floor that we saw last October, but beyond here there is little in the way of support until it hits between $54.00 and $54.50.

The sharpness of the decline also suggests there is scope for a rapid recovery once it does find a bottom. A return above $58 is needed to recoup the ground lost during the recent selloff, which is also aligned with the March-low.

MCD stock: Is there still appetite for McDonalds?

McDonalds is the most oversold it has been in 18 months after falling for six consecutive weeks, marking one of its worst losing streaks in years. The home of the Big Mac has hit a one-year low and followed a similar path to its drinks partner Coca-Cola, having felt the brunt of the recent selloff as markets fret over the state of the economy and a pullback in consumer spending. The selloff has seen its valuation multiple fall back in-line with its 5-year average, but it continues to hold a premium over its rivals.

Restaurant chains had remained in-demand as consumers kept spending using wallets filled with stimulus money, but those savings are now dwindling and the outlook for consumer spending is waning, which may temper valuations across the entire industry as the growth outlook deteriorates. Still, brokers believe the recent selloff in McDonalds shares has been overdone.

Turning to the chart, a strong open today will provide hope that the selloff is ending. It needs to close above $254.50 to snap its losing streak and set a floor. The immediate upside goal is to climb back above $260 to reclaim the floor that held throughout the whole of the first quarter of 2023.

UAL stock: United Air Lines crashes to 2023-lows

United Airlines is rebounding from its lowest level since early 2023, which had caused the stock to hit its most oversold level since the pandemic prompted a sharp selloff in travel stocks back in 2020.

Its rivals like American Airlines and Delta Air Lines have also sunk into oversold territory. That is because the industry has been in freefall in recent weeks as markets fret that demand could slowdown at a time when the recent revival in oil prices is already hurting the industry’s margins and profits – with virtually every major airline recently warning that rising fuel costs would lead to lower profitability this year. That has put a dent in the travel industry’s recovery prospects.

We can see that the stock closed at $40.50 yesterday, in-line with the trough we saw back in March. The strong open today suggests we could find some form of floor around here. A slip below the $40 threshold and new 2023-lows are on the cards below here. It tried and failed ot break above $43 late last month, providing an immediate upside target.