April 3 Stock Scan Stocks Overextended from 200d SMA

Apr 3, 2011: 5:51 PM CST

It’s back – and you’d be surprised at how few changes there were in the Top Three Extended Stocks from their 200 day SMA.

I originally posted a similar screen on March 21st and – surprise – there few changes to the top listing via the FinViz stock screener.

Let’s take a look at the Top Overextended Stocks and get down to the logic of this list:

From March 21st, the top three list was the following:

1.  TSO (Tesoro)
2.  NOV (National Oil Well)
3.  MEE (Massey Energy)

With COG coming in 1% less than the 4th place stock CBG.  COG now occupies the third slot – up 52% above its 200 day SMA.

Speaking of COG (Cabot Oil & Gas), let’s take a look at its current and past performance:

I’m showing this chart to give you an idea of the effectiveness of this simple scan.  To me, this is the easiest way to find strong trending stocks – the best of the best – via a simple scan.

Because trading is such an individualized game, some traders see the above chart and say:

“Gosh, it’s so strong.  I’ll add it now or perhaps later on a pullback to the 20 EMA.”

while others say:

“Wow – it’s SO grossly overextended.  It’s going to snap-back soon so I’ll short it right now!”

I use these scans for the following reasons:

Stocks that are strongly/the most overextended from their 200 day SMA implies a strong/powerful uptrend in place and odds favoring trend continuation, particularly if the daily charts show price above the 20 and 50 day averages along with other chart factors that are confirming the bullish stance.

In other words, these would be filtering out some of the strongest stocks in the S&P 500 based on price and moving averages – an important fact to start additional charting.

Second, for those bold and daring, stocks tend to play by mean reversion over time, so if you’re capturing today’s most overextended stocks, you might look for “fade” or “breakdown/reversal” signals on the daily chart.

In essence, depending on your personal type of trading (trend following or mean reversion/fade), this list is a simple way to generate candidates for trading or investing/positioning.

As I mentioned last time, my preferred usage is for trend following/momentum/trend continuation strategies using these top names.  I’m not one to fade price/trend strength, but I’m also not one to buy price just because it’s at a new high.

Show me strength then show me a pullback and then I’m interested – at least from a superior Reward/Risk standpoint.

Let’s take the top-spot stock Tesoro (TSO) for example.

When I originally showed this scan on March 21st, TSO closed at $25.63.  It did so very close to its rising 20 day moving average, and the trend structure was positive, hinting at a possible buy-in retracement opportunity.

As of Friday, TSO closed at $27.04, up 5.5%.

Similarly, MEE showed up again in the top three this time.  It closed March 21st (an arbitrary date) at $62.40 and not sits at new recovery highs at $69.24, up 11%.

It’s not surprising that all stocks in the top 5 from my March 21st scan  were up over that time period, as the broader market surged forward.

Traders who used this length to find “strong names that are likely to get stronger” did better than those trying to use this list as a “strong stock that will soon weaken/breakdown” idea generator.

Anyway, with that bullish news in mind, what are the three weakest (most under-extended) stocks?

TLAB took the top spot again, down 21% from its falling 200d SMA.

TLAB favored the second-style of trading tactics from this list – bouncing up from $4.92 on March 21 to $5.18 on April 1st – a tiny price move but a 5% rally in a “Fade” style retracement “snap-back.”

The retracement gives a possible shorting opportunity on a pullback after a so-far successful “snap-back” fade trade.

You can also use this type of information to see what sectors are hot and which are not – in aggregate.

As I mentioned last week, Basic Materials stood out with 4 of the top 5 slots to the upside.  This week, it’s also 4 of 5 of the top slots, though some of the names have changed.  If you’re looking for strength, try the Basic Materials sector.

And if you’re looking for weakness, look to Retail/Services/Technology.  Of the bottom 10 performers, Services and Technology comprised 9 stock slots (a Financial stock was the only one of the lower “top 10” not to be in the Service or Technology sectors).

Anyway, as you can see there’s a lot of ways to use this list and I’ll keep you posted a couple times per month on changes or new data from these scans so stay tuned!

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

2 Comments

2 Responses to “April 3 Stock Scan Stocks Overextended from 200d SMA”

  1. Stock Scan Top 5 Most Extended from 200d SMA | Afraid to Trade.com Blog Says:

    […] While not listed in the Top 5, I wanted to update on some of the stocks in the April 3rd Top Extended Update: […]

  2. May 25 Checkup on Most Overextended Stocks from 200d SMA | Afraid to Trade.com Blog Says:

    […] April 3 2011 Update […]