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Down 35.3% in 4 Weeks, Here's Why You Should You Buy the Dip in Earthstone Energy (ESTE)

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A downtrend has been apparent in Earthstone Energy (ESTE - Free Report) lately with too much selling pressure. The stock has declined 35.3% 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.

Here is How to Spot 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 ESTE

The heavy selling of ESTE shares appears to be in the process of exhausting itself, as indicated by its RSI reading of 28.45. So, the trend for the stock could reverse soon for reaching the old equilibrium of supply and demand.

3-month RSI Chart for ESTE

The RSI value is not the only factor that indicates a potential turnaround for the stock in the near term. On the fundamental side, there has been strong agreement among the sell-side analysts covering the stock in raising earnings estimates for the current year. Over the last 30 days, the consensus EPS estimate for ESTE has increased 14.4%. And an upward trend in earnings estimate revisions usually translates into price appreciation in the near term.

Moreover, ESTE currently has a Zacks Rank #1 (Strong Buy), which means it is in the top 5% 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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