Top Stocks Extended from their 20 day SMA

Apr 17, 2009: 12:16 PM CST

Sometimes I like to look at the top 10 stocks that are extended most beyond their 20 day simple moving average as a guage of strength/weakness, and because it is a unique type of price scan.  Let’s see the Top 10 and Bottom 10 most extended stocks in the S&P 500 above or below their 20 day Simple Moving Average.

Top 10 Stocks Extended Percentage above 20 day SMA:

We see a collection of Financial companies in the Top 10, which is unsurprising, given the strength in the overall Financial sector over the last month.

Notice also that it’s easy to achieve a high percentage extension when a stock is low-valued, so it might be more useful to filter out stocks over $20 per share, which I sometimes do as well.

Top 10 Stocks Extended Percentage below 20 day SMA:

There’s not really an observable pattern in the industry groups that are most extended beneath their 20 day SMA, though perhaps not surprisingly, General Motors (GM) is the most overextended.

A secondary observation is that these overextensions to the downside are far smaller than the upside overextensions, meaning the “worst” stock is 22% under its 20 day moving average while the “best” stock is 77% above its SMA.  You don’t need that to tell you we’ve been in a bullish swing, but it helps put it into better context to see the stocks beneath the index strength.

There’s two ways to ‘play’ stocks that are extended so far above their respective moving averages.

First, you can try to set up “Counter-trend” or “Mean Reversion” trades under the logic “If a stock is SO overextended, it will soon pull back to its average soon.”  This can be a risky strategy in a run-away market, where stocks continue to get overextended.

Second, you can use these as trend and momentum filters, as you do further analysis on these stocks under the logic “What is strong will continue to get strong… what is weak will continue to get weak” and try to play for big wins off developing strength/weakness.

It’s up to you how you use your scans, but this is a type of scan you might not be using which could be of value as you find stocks to trade… or fade!

Corey Rosenbloom
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1 Comment

One Response to “Top Stocks Extended from their 20 day SMA”

  1. Victor Berry Says:

    Textron (TXT) is rumored to be the target of a takeover/buyout by a consortium from the United Arab Emirates. Rumored buyout price is about $21 a share although a couple of financial analysts say TXT is worth only $12-$13 a share. Note however that targets of takeovers/buyouts often seem to be offered much more than they’re worth since I think the buyer can record the overpayment as a goodwill asset on his balance sheet.

    The TXT quarterly financial earnings report is due out on 29 April 2009 and I suspect the primary subject of the financial analyst conference call will be about the rumored takeover/buyout. Given Textron’s debt burden, I hope the rumor is true because it sure would be beat Chapter 7 bankruptcy.

    FULL DISCLOSURE: I own some TXT stock at a dollar-cost-average price of $14.50, so I have a vested interest in the best possible outcome for Textron.