Oversold

The mirror of an overbought reading. When a bounded oscillator drops through a lower threshold, the calculation is reporting that recent closes are concentrated near the bottom of their own recent range. As with the upper threshold, the level is a convention set by whoever published the method rather than a property of the market, and different authors specify different ones.

Nothing in it says a price has fallen too far, because nothing in it knows what the thing is worth. Markets fall for reasons, and a currency whose central bank is cutting rates, or a company whose earnings are deteriorating, produces oversold readings continuously while the underlying situation develops. The reading measures the speed of the decline against its own recent history and stops there.

The failure is the same one in the other direction and is more punishing, because declines tend to be faster than advances: in a sustained downtrend the reading stays pinned near its lower extreme for long stretches, so the moments that look most extreme are the ones where a mean reverting reading of them is weakest. Whether the asymmetry between falls and rises is large enough to matter for any particular method is measurable, disputed, and dependent on the market and the period tested. The convention that survives most consistently in the literature is to treat the label as a description of what has already happened.