Down 10% in 4 Weeks, Here's Why You Should You Buy the Dip in NXP (NXPI)

NXP Semiconductors (NXPI) has been beaten down lately with too much selling pressure. While the stock has lost 10.1% over the past four weeks, there is light at the end of the tunnel as it is now in oversold territory and Wall Street analysts expect the company to report better earnings than they predicted earlier.

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 benefiting 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 NXPI

The heavy selling of NXPI shares appears to be in the process of exhausting itself, as indicated by its RSI reading of 28.16. 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 NXPI in raising earnings estimates for the current year has led to an increase in the consensus EPS estimate by 0.8% over the last 30 days. And an upward trend in earnings estimate revisions usually translates into price appreciation in the near term.

Moreover, NXPI currently has a Zacks Rank #2 (Buy), which means it is in the top 20% of more than 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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This article originally published on Zacks Investment Research (zacks.com).

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