Stock of the Day: Where is the Bottom for Royal Caribbean?

Shares of Royal Caribbean Cruises Ltd. (NYSE:RCL) are lower in premarket trading on Thursday. The shares have dropped by more than 20% in just over a month.

But now they are extremely oversold. They are also getting close to a support level. These two dynamics could set the stage for a reversal. This is why Royal Caribbean is the Stock of the Day.

When a stock is oversold, it is below its typical or normal trading range. This can be important. Many trading strategies are based on mean reversion.

Oversold conditions can draw buyers into the market and push the price higher.

The lower part of the chart is the Relative Strength Index (RSI). If the blue line is below the horizontal red line, it indicates oversold conditions.

As you can see, that is the case now. Based on this metric, this is the most oversold that Royal Caribbean has been in more than four years.

The stock is also getting close to a support level. There was support around $241 in November. There was also support there in May.

Support tends to form at levels that were previously support because of remorseful or regretful sellers. These are people who sold their shares at support who vowed to buy them back if they could eventually get them at their selling price.

As a result, when the shares drop back to the level, they place buy orders. If there are enough of these buy orders, they can create support.

This means that if Royal Caribbean reaches $241, it may find a bottom there again.

Stocks can rally off support when some of the buyers who created the support become anxious and impatient. They worry that other buyers will be willing to pay higher prices, and they know this is who the sellers will go to.

So, they increase their bid prices. Other impatient buyers see this and do the same. This forces the shares into an uptrend.

The combination of being oversold while at support can set the stage for a reversal and a move higher.

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