Opportunities from the Scan of Top 5 Stocks Most Over and Underextended in May

May 29, 2013: 12:52 PM CST

Which stocks are the most over-extended and under-extended from their 200 day Simple Moving Average and what trading opportunities do these stocks offer?

Let’s update the scan and take a look at some of the opportunities that make this scan useful.

First, here are the top five SP500 Stocks most Over-extended from their rising 200d SMA:

The chart above – taken from FinViz.com – shows the percentage difference between the current price and the 200 day SMA.

For example, the most overextended stock First Solar (FSLR) is almost 77% above its rising 200 day SMA.

This stock is a good method for finding stocks in persistent uptrends, meaning we can use these as buy candidates via retracements or breakouts to trade with the prevailing trend.

Aggressive or “reversal-style” traders can use this list instead to find quick opportunities to play “fades” or even trend reversal trades when trade opportunities signal a possible reversal is developing (such as the break under a key support level).

Netflix is such a stock that showed persistence of uptrend, as it appeared as the #1 most over-extended stock from our February update.

Let’s take a look at popular stock Netflix (NFLX) to see how this may be applied:

Although Netflix (NFLX) has been in a persistent uptrend since reversing from the mid-2012 lows, it faces a critical price inflection point into the confluence of the prior swing low, 50 day EMA, and lower daily Bollinger Band all converging at the $205 price level.

Pro-trend retracement traders can do additional analysis to determine a long/buy trading opportunity depending if they want to buy into support (with a tighter stop) or wait for a bit of chart-evidence of a likely upward swing which could come in the form of a break above a daily reversal candle or falling trendline (via bull flag logic).

The prior pro-trend retracement opportunity like this developed on the touch of the rising 20 EMA into this level in April.

Reversal traders may want to play an early entry into a possible trend reversal on a clean breakdown and close under the $200 round number area.  Note the divergence into the recent $250 high which adds a touch of bearishness to the strong uptrend.

Another example of a persistent uptrend with cautious divergences is Best Buy (BBY):

Best Buy (BBY) previously appeared on another one of these updates of stocks most under-extended from their 200d SMA (April 2012) as the #3 most unde-rextended stock at the time.

From there, though the downtrend did continue until late 2012, two breakout/reversal signals developed in early 2013 that preceded the recent strong uptrend; Best Buy now appears as the #4 most over-extended stock.

Like Netflix, Best Buy traded in a strong uptrend yet is showing signs of caution through volume and momentum divergences from April to today.

Reversal-style traders will want to see a clean breakdown under $26 and preferably $24 to play a larger reversal opportunity; bullish traders instead want to see the stock break above $27 for a potential breakout and pro-trend continuation opportunity.

The same type of logic holds for the Top 5 Stocks Most Under-extended from their falling 200d SMA:

To continue the discussion, Cliffs Natural Resources (CLF) and Apple (AAPL) appeared as the #1 and #4 most under-extended stocks from the February 2013 scan.

The persistence of the downtrend continued in these stocks where they interestingly appear in the same location on the under-extended list as they did three months ago.

Apple is facing another key challenge of “possible reversal” vs. downtrend continuation, giving bulls and bears potential opportunities depending on how price behaves at the current inflection point.

Reversal buyers/bulls may jump into the stock quickly on a breakthrough above the $460 level, generating a clean potential reversal signal with an upside target at least to $520.

Pro-trend continuation bears/sellers are looking for a breakdown under $440 to trigger a short-term bear flag and open the next downside (pro-trend) target back to $420 then $400 and under $380.

Cliffs Natural Resources (CLF) developed initial signs of reversal, yet a bull trap triggered the current sell-swing and continuation of the downtrend in motion:

While there are many examples of the concept, CLF reminds us that fighting a trend in motion can be frustrating, even with valid reversal signals.

A lengthy positive divergence developed through the early part of 2013 which culminated in a breakout – a reversal trigger – above the prior high and falling 50d EMA at the $22 per share level… only to see a bull trap take price back under the $22 breakout level and now under the rising trendline to trigger a pro-trend retracement opportunity here which targets the prior low from April as a minimum target.

You can apply your analysis to the remaining candidates that appeared on the 200d SMA scan results.

Study the prior updates for additional insights and lessons how to generate trading opportunities depending on your preferred style of trading (pro-trend or counter-trend/reversal).

Feel free to share your thoughts or trade opportunities you’re seeing in these stocks (including links to a blog post) in the comment section.

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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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3 Responses to “Opportunities from the Scan of Top 5 Stocks Most Over and Underextended in May”

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