Which stocks in the S&P 500 are most over and under-extended from their 200 day Simple Moving Averages? And how might we use this information for potential upcoming trades?
Let’s take a look at the new scan results at the end of August 2012 and find out.
Here’s the Top 5 Stocks Most Over-Extended S&P 500 Stocks above their 200d SMA:
The reason we run these scans is to find stocks in mature uptrends that offer two divergent trading strategies.
For aggressive traders, these offer the most overextended stocks that may experience a retracement for ‘fade’ or mean-reversion style (counter-trend) strategies.
However, it’s more common to use these scans to find strong stocks that may continue to get stronger. As such, traders would look to buy future retracements or breakout opportunities in the context of a strongly trending stock.
I also would suggest eliminating low-priced stocks from both scans because small moves in low-priced stocks (under $10) exaggerate the percentage difference between the current price and the 200 day SMA. As such, we’ll throw-out Sprint (S) from this list.
The top stock at the moment is thus Pulte Group/Pulte Homes (PHM) which is seen in the chart below:
I’m highlighting bullish/buy volume spikes in 2012 which are signs of potential future trend continuity, which indeed has been the case.
Pulte is not at all time highs, but is currently challenging an important known resistance level (see weekly and monthly chart) at $14 which could allow for a breakout-buy opportunity if resistance breaks.
Either way, the scan may put PHM on your stock-screen list where you may otherwise not have added it.
I also wanted to highlight Gap, Inc (GAP), a popular retail/clothing store that has doubled in price during 2012:
We see the same bullish volume spikes/confirmation in volume along the duration of the strong uptrend.
The recent upward gap (confirmed with volume and momentum) thrust price well-above the rising 200d SMA.
Unlike PHM, GPS is at new recovery price highs not seen since the 2001 recession.
On the flip-side of the bullish/buy strategy is the bearish stocks in downtrends most under-extended beneath their 200 day SMA:
Similarly, we’ll eliminate AMD (Advanced Micro Devices) from the results along with Alpha Natural Resources (ANR), both of which trade under $10.
That’s not saying you can’t place trades in these stocks, but that their low prices exaggerate the percentage difference.
With that in mind, let’s pick out two names to view their daily charts: The first is Cliffs Natural Resources (CLF):
Just as we see spikes in bullish/buy volume in the uptrending stocks, we see spikes in sell/bearish volume during sell-swings in prevailing downtrends.
Notice the breakdown from support opportunity at $60 per share in May along with a similar support break at $45 in late July and the recent bear-flag into resistance in mid-August.
CLF now trades at new daily chart lows, but the visual low is the $10 region which was seen at the stock market bottom in early 2009.
A breakdown here could prolong the downtrend accordingly.
Next, we’re seeing general weakness in the for-profit education stocks, such as DeVry (DV) and Apollo Group (APOL) seen below:
Again we see visual volume spikes on sell-swings/gaps in price as the prevailing downtrend continued through 2012.
Unlike CLF in the chart above, APOL is making new chart lows not seen since 2001.
Once again, we can use this simple scanning tool (data from FinViz) to locate stocks in prevailing up or down trends and look to play our trading strategies accordingly.
While I certainly favor pro-trending strategies, other traders prefer to use these scans to play trend reversal or mean-reversion/fade strategies.
Either way, the simple 200d SMA Extension scan allows you to find and study stock candidates that may otherwise not appear on your radar.
Corey Rosenbloom, CMT
Afraid to Trade.com
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