General Mills, Inc. GIS is trading higher on Friday after shares lost more than 30% since September. But that may be about to change.
The stock is oversold on both a long-term and short-term basis. This is why we have named it our Stock of the Day.
Many trading strategies are based on the concept of reversion to the mean. If things get extended too far in one direction, there is a good chance that there is a reversal or reversion back to the average.
Most of the time, a stock stays within its normal or typical trading range. If it gets aggressively sold and is pushed below this range, traders will say it is “oversold.” These conditions will draw buyers into the market.
They will be expecting a move higher, and their buying could force the price higher.
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Many investment funds utilize statistics and probability theory to identify trading ideas. One concept that is widely used is the concept of standard deviation.
Statistics suggest that 95% of trading should fall within two standard deviations of the mean or average. This means if a stock is more than two standard deviations away from the mean, there is a good chance that it reverses.
The red line on the chart is two standard deviations below the 20-day moving average. General Mills has exceeded this threshold to the downside. This means it is oversold on a short-term basis.
The black line on the chart is two standard deviations below the 20-week moving average. As you can see, the shares are also below this threshold. This means that they are also oversold on a long-term basis.
In addition to being extremely oversold, the stock has also dropped to a support level. In August 2021, there was support around $50. Support can remain intact for a long time, and stocks tend to rally when they reach their support level.
This support may put a floor under the price, and the extreme oversold conditions may draw buyers into the market. General Mills could be on the verge of a rally.
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