Let's take a look at the most recent scan for the top stocks most over and under extended from their respective 200d SMA to get a sense of potential trading opportunities.
Depending on your style of trading, you can use these scans for aggressive "fade/reversal" opportunities or pro-trend retracement style strategies.
Here are the stocks most over-extended from their rising 200d SMA:
In general, we don't count stocks that are trading under $10.00 into the scans because the low price distorts the percentage movement.
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While Sprint (S) is the most overextended stock, it's also trading at $5.50 and is 53% overextended above the 200d SMA (at $3.75).
For swing trading opportunities, we tend to focus on stocks that have higher prices and thus are more likely to make larger dollar movements.
I'm showing the charts of the #2 and #3 most overextended stocks in the S&P 500 below which are Pulte Homes (a popular homebuilder) and Gilead Sciences (a pharmaceutical company):
Interestingly, Pulte Homes (PHM) is at a similar inflection point that we can see in Gilead (GILD) in terms of price retracing – in a known uptrend – to the rising 50 day EMA which is often a ‘make or break' level for trends.
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GILD successfully rallied off the 50d EMA and PHM similarly will either rally up in a pro-trend retracement trading opportunity or else break sharply under it for a trend reversal trading opportunity.
This also gives us a sense of how you can use these scans for your own trading style.
If you prefer to trade trend reversals or ‘fade' overextended stocks, then these stocks represent the most overextended stocks from their 200d SMA and may reverse.
If instead you are more like me and prefer to find pro-trend retracement-to-support trading opportunities (like flags or trades off rising moving averages), you can place these stocks into a watchlist and look to enter when price retraces to the 20 or 50 day moving average or other pivot/reference level.
While PHM currently challenges the support of the rising 50d EMA, we see clear negative divergences in momentum and price which raise the caution flag for a potential reversal which would trigger on a breakdown under $16 and the $15.50 (prior support low) level.
Here is the successful ‘flag' retracement breakout that just triggered in GILD:
There's no trade here at the moment, at least from a buy-side, though very aggressive traders may be looking to play a ‘fade' or counter-trend movement (retracement) back to rising moving averages.
Counter-trend strategies – including ‘fades' – tend to be more risky than pro-trending retracement strategies in general.
You can view the charts of Whirlpool, Constellation Brands, and Titanium Metals for additional possible strategies.
Finally, here are the top stocks most under-extended from their falling (downtrending) 200d SMA:
Traders may be looking for "bottoms" or buying opportunities in these overextended stocks (reversal strategies) while others may be waiting for pro-trend retracement strategies to trade in the direction of the prevailing downtrend.
Using similar logic, we'll throw out AMD as a potential candidate and may even do so with DELL which recently broke under the $10.00 price threshold.
Here are the charts of Apollo (APOL) and JC Penny (JCP) which are currently the most over-extended stocks:
Reversal or ‘fade' traders will be watching for any bounce/rally off the current $19 low while pro-trend retracement traders will look to enter after any bounce that may develop from this level.
Notice the price action in late June – after what looked like a trend reversal above the $35.00 level developed, ultimately the strong downtrend resumed and reversal traders became trapped in the sell-off.
Similarly, what looked like a logical bullish reversal from July to September devolved violently into a pro-trend (downtrend) continuation move which resulted in a powerful sell-off/collapse to the current $18.00 per share level.
Price recently broke to new chart lows not seen since August 2010 and should price continue the downtrend, shares will revisit lows not seen since the 2009 stock market bottom (JCP bottomed near the $14.00 level).
You can identify similar pro-trend retracement or counter-trend fade/reversal opportunities in the other under-extended stocks of Hewlett-Packard (HPQ), Dell (DELL), and Cliffs Natural Resources (CLIF).
These stocks offer another style of scanning tactic that can alert you to stock names you might not otherwise have encountered.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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