September Scanning for Overextended Stocks

Sep 15, 2014: 11:40 AM CST

What are the top five most over-extended (bullish uptrending) stocks and which are the top five under-extended (bearish downtrending) stocks in the S&P 500 right now?

Let’s update our scans and see what they are and how we may trade them.

We’re defining “over-extended” as being the highest percentage “extended” above the rising 200 day Simple Moving Average (SMA) and we scanned all stocks in the S&P 500 (using FinViz.com).

At the moment, Southwest Airlines (LUV) is the most “over-extended” stock as we can see from the chart below:

Not only is it an over-extended stock, it’s a strong-trender according to our principle “Strong Getting Stronger.”

The two main ways to use this scan are the following:

1.  Identify strong trending stocks and put them on a watchlist to buy shares on a future retracement

2.  “Fade” an over-extension aggressively by short-selling a price movement into the upper Bollinger Band

I prefer buying retracements as opposed to fighting a trend or ‘scalping’ retracements but each trader uses individual strategies.

Other over-extended and trending stocks using this definition include Avago (AVGO), Tenet Health Care (THC), Edwards Lifesciences (EW), and Monster Beverages (MNST).

We can use the same logic in reverse to discuss “under-extended” or bear-trending candidates:

Similarly, the most under-extended stock from its falling 200 day SMA is Whole Foods Market (WFM):

The stock just triggered a bearish sell signal or bear flag entry on a breakdown under a rising “flag” trendline and the 20/50 EMAs into the $39.00 per share level.

Playing retracements is an effective trend continuity strategy while playing reversals – trying to call a bottom – is an aggressive ‘trend reversal’ strategy.

Additional bearish candidates include Genworth Financial (GNW), Diamond Offshore (DO), Coach (COH), and Peabody Energy (BTU).

While this is a relative simple stock scan, it can highlight potential trading candidates – especially for swing traders – that you may not otherwise have located on a complex stock scan.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s 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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