Which stocks are most over or under-extended from their 200 day simple moving average?
Let’s take a look at the current scan results and the opportunities these stocks may present.
First, here are the most ‘bullishly over-extended’ stocks in the S&P 500:
This scan returns the percentage distance above or below the 200 day Simple Moving Average as a quick measure of trend strength or price over-extension.
When you’re looking at these stocks, eliminate those which have a sudden or large recent gap which will skew the percentage, especially in low-priced stocks.
What you want to identify is a salient, persistent trend on the Daily Chart and from there, you have two specific trading strategies:
“Fade” Traders can look to play SHORT for a quick ’scalp’ trade from an overextended new high to target a quick move back towards the 20 day moving average or else some sort of lower support trendline.
“Pro-Trend Retracement” Traders instead will identify the strong trend in motion and then look to buy (put on swing positions) as price returns to these rising trendlines or moving averages for a low-risk, pro-trend retracement trade.
Let’s see how these have worked recently in our top-extended stock PulteGroup (PHM):
The red arrows indicate counter-trend “Fade” trades (those that seek to enter into the upper Bollinger on an extended price swing and target rising moving averages or trendlines as price ‘works off’ the over-extension).
The green arrows indicate typical pro-trend “Retracement” trades which seek to enter on the pullback to trendlines or moving averages, or else on the break above a falling ‘bull flag’ trendline (for a less-aggressive entry).
Watch to make sure you see steadily rising volume on each up-swing to have greater confidence in a successful retracement outcome (targeting at least the prior swing high or into the upper Bollinger Band).
Not all retracements work perfectly – the April move under $8.50 in PHM is an example of a retracement that went deeper than expected yet the trend still continued higher which brings us to our current ‘overextended’ rally (a chance for short-sellers to play against the recent swing).
Other stocks in the Top 5 SP500 list include Lennar Homes (LEN), Regions Financial (RF – a low-priced stock), Gap Inc (GAP – a popular retail/clothing store), and Masco Corp (MAS).
It’s generally a good sign for the economy that the top extended stocks are two home-builders, a financial company (albeit a small one), and a retail company.
The logic is just the opposite for the Top-5 Under-extended stocks.
Finally, here are the most ‘bearishly under-extended’ stocks in the S&P 500:
I’ve been doing these scans frequently, and one name seems to keep reaching the top of the list: First Solar (FSLR).
From the chart, it’s easy to see why:
First Solar (FSLR) is becoming a case-study in pro-trend logic (“The trend is your friend” – “Do not fight a trend”).
Again, Pro-Trend Retracement traders had numerous retracement or ‘bear flag’ style opportunities all the way down.
While the trend has been strongly negative, counter-trend “Fade” traders have also had successful swings or quick scalps in the stock – good for quick-aggressive $5.00 to $10.00 ’scalp swings.’
It’s worth noting that counter-trend scalp strategies should only be deployed by aggressive and preferably very experienced traders – new or developing traders should play the safer pro-trend retracement opportunities which carry lower risk and defined entries and stop-losses.
The remaining stocks in the under-extended list include NetFlix (NFLX which garnered a lot of attention during its decline from its $300 per share peak), Alpha Natural (ANR), Chesapeake Energy (CHK – which also has appeared in prior under-extended scans), and MetroPCS Communications (PSC).
Remember, this is a quick-scan for potential trading opportunities depending on the style of trader you are and the strategies you use.
Don’t just “scan and trade” – do a bit more homework as always before putting on any trading position though these types of scans can reveal names you might not consider otherwise.
Corey Rosenbloom, CMT
Afraid to Trade.com
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