How to Use RSI for Spotting Stock Reversals: A Telefonica (TEF) Case Study

Understanding the RSI Indicator

When traders hunt for oversold stocks primed for rebounds, they often turn to the Relative Strength Index (RSI). This momentum oscillator measures the velocity and magnitude of price swings, oscillating between 0 and 100. The conventional wisdom suggests that an RSI reading below 30 signals oversold conditions—essentially, the stock has been beaten down beyond its intrinsic worth. But what makes RSI useful? It helps investors identify potential inflection points where price reversals might occur. Of course, like any single tool, RSI shouldn’t be your sole decision-making mechanism; it works best when combined with fundamental analysis.

The Mechanics of Reversals

Every security experiences natural cycles of being overbought and oversold, regardless of company quality. When selling pressure reaches exhaustion—indicated by an RSI dipping into oversold territory—the stock often finds a floor. At that moment, disciplined investors begin calculating whether the discount to fair value presents an opportunity. The key is recognizing when panic selling has run its course, not predicting the exact timing.

TEF’s Technical Setup

Telefonica (TEF) presents an interesting example. The stock has declined 22% over the past four weeks, creating significant downward momentum. Currently, its RSI reading sits at 27.29, firmly in oversold territory. This technical reading alone suggests the heavy selling may finally be exhausting itself. The supply-demand equilibrium could rebalance soon, potentially triggering a rebound.

Fundamental Confirmation Matters

Technical signals are strongest when backed by improving fundamentals. In TEF’s case, sell-side analysts have been raising earnings expectations. Over the last 30 days, consensus EPS estimates have climbed 17.7%. Upward earnings revisions typically precede stock price appreciation, as they signal improving business performance. Additionally, the stock carries a favorable ranking, placing it in the top tier of securities based on earnings estimate revision trends and earnings surprise metrics. This convergence of oversold technicals with strengthening earnings outlook creates a more compelling case for potential recovery.

Key Takeaway

When using RSI to hunt for turnaround candidates, remember that oversold readings represent opportunity only when paired with improving business fundamentals. Telefonica (TEF) demonstrates this principle: its technical exhaustion combined with rising analyst expectations suggests the selling capitulation may finally be complete.