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Hutchison China MediTech (HCM) Loses 19.2% in 4 Weeks, Here's Why a Trend Reversal May be Around the Corner

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A downtrend has been apparent in Hutchison China MediTech (HCM) lately with too much selling pressure. The stock has declined 19.2% over the past four weeks. However, given the fact that it is now in oversold territory and Wall Street analysts are majorly in agreement about the company's ability to report better earnings than they predicted earlier, the stock could be due for a turnaround.

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 a Trend Reversal is Due for HCM

The RSI reading of 29.34 for HCM is an indication that the heavy selling could be in the process of exhausting itself, so the stock could bounce back in a quest for reaching the old equilibrium of supply and demand.

3-month RSI Chart for HCM
3-month RSI Chart for HCM

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 HCM in raising earnings estimates for the current year has led to an increase in the consensus EPS estimate by 4.3% over the last 30 days. And an upward trend in earnings estimate revisions usually translates into price appreciation in the near term.

Moreover, HCM 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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