3 large caps with RSIs that scream 'oversold'

Key Points

• DocuSign enjoyed a broad rally, but this week's update spoiled the party.
• APD has the lowest RSI of the bunch, and shares are consolidating from the drop. 
• Charter stock has started to bounce back, and investors should expect more upward momentum in the short term. 

Despite a soft start to the year, it's looking like stocks have their mojo back and are continuing to build on the upward momentum that started last quarter. All the key indices are back to all-time highs in an astonishing recovery rally that Wall Street is still getting to grips with. 

Considering the strong performance of equities overall, especially the continued strength of the S&P 500 this week, individual stocks trending down instead of up are worth watching closely. In recent weeks, three large-cap stocks have diverged violently from their peers to the extent that their relative strength index (RSI) readings now suggest they're oversold. 

The RSI, a widely respected technical indicator of a stock's overbought or oversold status, calculates a score between zero and 100 based on the preceding 14 days of trading. A reading below 30 indicates oversold conditions and suggests a potential rebound, while a reading above 70 signals overbought conditions and implies a likely pullback. Let's dive in and see how the RSI can be used to our advantage. 

Docusign Inc.

Shares of the electronic signature platform DocuSign Inc. NASDAQ: DOCU  had enjoyed a solid end-of-year rally with the rest of the market, gaining 70% through the first few weeks of January. But a 20% drop in the past week will have reminded investors that DocuSign is still a shadow of its former self and a stock that must prove it's changed for the better. 

Readers will remember DocuSign as one of the darlings of the pandemic and one of the textbook cases of those tech stocks that went from boom to bust in the aftermath. Last month, news that two private equity firms were competing to acquire the beleaguered SaaS company sent shares soaring. But last week's update that talks with both had "stalled" understandably had an adverse effect that sent them into their current spiral. 

However, with an RSI reading of 30, DocuSign shares are definitely in oversold territory, and investors should be watching for a bounce back. 

Air Products and Chemicals Inc.

Air Products and Chemicals Inc. NYSE: APD is one of the few stocks that didn't rally through November and December. Instead, it continued the slow slide that started back in 2022, which has turned into something quite nasty this week. A bad earnings miss on both headline numbers in their Q1 report earlier this week confirmed investors' worst fears and sent shares plunging to four-year lows. 

However, with the RSI already reading 22, the bears are unlikely to be able to keep the pressure on, and we're already seeing signs of consolidation. Tuesday's low hasn't been retested, and the stock has closed higher in both sessions since. 

The opportunity here is a quick in-and-out one, as the longer-term upside just doesn't exist right now for APD. Investors should look for shares to get into the $220s and expect a sharp, albeit short-term, bounce back up through the critical $228 level.

Charter Communications Inc.

Like APD, Charter Communications Inc. NASDAQ: CHTR shares have diverged from the rest of the market since last quarter, but a 25% drop since last week has set it apart. It delivered a poor earnings report last week, with decelerating growth spooking investors, driving analysts to downgrade the stock. 

However, like APD, Charter's RSI is in the low 20s, pointing to extremely oversold conditions. Shares started trading up early in Friday's session, and investors could consider the dead cat bounce play here. The stock is back trading at 2017 levels, and you must think the worst-case scenario is priced in after this week's fall. 

Look for shares to gain into Friday's close, with the strong likelihood they'll continue rallying into the start of next week. Investors should exercise strong risk management when taking winners, as any turn back south could force a retest of this week's low.