American Airlines (AAL) has been on a downward spiral lately with significant selling pressure. After declining 14% over the past four weeks, the stock looks well positioned for a trend reversal as it is now in oversold territory and there is strong agreement among Wall Street analysts that the company will report better earnings than they predicted earlier.

Guide to Identifying Oversold Stocks

We use Relative Strength Index (RSI), one of the most commonly used technical indicators, for spotting whether a stock is oversold. This is a momentum oscillator that measures the speed and change of price movements.

RSI oscillates between zero and 100. Usually, a stock is considered oversold when its RSI reading falls below 30.

Technically, every stock oscillates between being overbought and oversold irrespective of the quality of their fundamentals. And the beauty of RSI is that it helps you quickly and easily check if a stock's price is reaching a point of reversal.

So, by this measure, if a stock has gotten too far below its fair value just because of unwarranted selling pressure, investors may start looking for entry opportunities in the stock for benefitting from the inevitable rebound.

However, like every investing tool, RSI has its limitations, and should not be used alone for making an investment decision.

Why AAL Could Bounce Back Before Long

The heavy selling of AAL shares appears to be in the process of exhausting itself, as indicated by its RSI reading of 20.75. So, the trend for the stock could reverse soon for reaching the old equilibrium of supply and demand.

This technical indicator is not the only factor that calls for a potential rebound for the stock. There is a fundamental indicator as well. A strong agreement among sell-side analysts covering AAL in raising earnings estimates for the current year has led to an increase in the consensus EPS estimate by 0.9% over the last 30 days. And an upward trend in earnings estimate revisions usually translates into price appreciation in the near term.

Moreover, AAL currently has a Zacks Rank #2 (Buy), which means it is in the top 20% of more than the 4,000 stocks that we rank based on trends in earnings estimate revisions and EPS surprises. This is a more conclusive indication of the stock's potential turnaround in the near term. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>

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American Airlines Group Inc. (AAL) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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