How to Know If a Stock Is Oversold

First of all, there are two meanings for an oversold stock. One relates to a stock's price in relation to its uderlying fundamentals. The other relates to a stock's price and its chart (Technical analysis). In this article I will address both.
OVERSOLD STOCK BASED ON FUNDAMENTALSWhen a stock price drops enough that the stock is 'cheap' in relation to other alternatives or itself, then it could be a good investment opportunity. Fundamentals such as earnings, margins, assets and the company's balance sheet must be analyzed. This is the realm of 'value investing'. Normally an oversold stock has a low P/E or PEG ratio or a low price to tangible book value.
OVERSOLD STOCK BASED ON TECHNICALSTo know if a stock is oversold using technical analysis the common tool used is the 'stochastic oscillator'. This is basically a momentum indicator. It uses two lines, %K and %D to measure the price movements in a stock's (or other asset) price. The two lines are always fluctuating whitin a certain numeric range. The range is between 0 and 100 for both lines. If the reading is above 80 it indicates that the stock could be overbought. It the reading is below 20 it would indicate that the stock is oversold. These numbers are intended to mean that a tren is unsustainable. Keep in mind they could just mean that the prices will be flat for a couple of days before returning to the previous trend.
I hope this information was useful. For more investment related articles check the resourses section near the bottom of this page.

How to Bet on the Stock Market

Learn about market behavior, financial and fundamental analysis, and technical analysis of trading charts. The more you know, the better your decisions will be, particularly in a fast-moving market. The North American Securities Administrators Association (NASAA) has a good online course in investing basics, and Investopedia has an introduction to technical analysis.
Practice your trading strategies using an online fantasy stock market. Read Investors Business Daily every day, and decide whether you want to buy, sell or wait for a better investing opportunity. Choose an ETF (exchange-traded fund) that interests you and fantasy trade that until you're ready to branch out into other stocks. Continue fantasy trading for at least three to six months. You are training yourself to react wisely to unexpected developments in the market and learning how the market moves in relation to economic indicators and company earnings reports.
Allocate only a small portion of your total trading account to your first few trades. Always keep a reserve in case you make a bad trading decision and take a substantial loss. As you make profits, take out and set aside your original investment amount in your trading reserve.
Control your risk by investing in mutual funds and ETFs, which give you maximum diversification for minimum investment. Diversification tends to protect against the risk of a single credit, or sector.
Use dollar cost averaging to avoid the risk of investing all your money at a market high. Invest a fixed amount at regular intervals in the same stock each time until you have established a full position. For most people, this means buying one or two different stocks, an ETF or a mutual fund. One of the best places to do this inexpensively is Sharebuilder.com. Investing a fixed amount at regular intervals in a variety of things does not achieve dollar cost averaging.