The Five Stocks Most Overextended from 200d SMA March 21

I’ve written in the past about a simple screener tool that highlights the five most overextended stocks from their 200 day Simple Moving Average and how you can use the data in different ways.

Let’s start with the 5 top overextended stocks as of March 21st and then see what strategies may be used:

Courtesy the Screener Tool at FinViz, we see not only the top five ‘overextended’ stocks, but we see a cluster of these stocks in the same Sector: Basic Materials.

That alone gives us information that the Basic Materials sector is doing quite well, and in fact broader Sector Rotation Data show that currently. Savvy traders and investors may want to dig around more in stocks in this sector, particularly given the rises in commodity prices.

But that’s a different issue.

These are the top 5 stocks in the S&P 500 and the green percent number under the “SMA200″ column shows the percent the stock is extended above the 200d SMA.

For example, Tesoro Corp – TSO – is 63% extended from the average.

Let’s see that on the daily chart:

The GOAL with this type of screen is to find the most powerful (or uptrending) stock in the market based on difference from a known reference level – the 200d SMA.

You would look individually at the fundamentals (if investing) or technicals/charts (if trading) to get a better sense of what your next play might be.

For example, TSO has been strongly rising up off its 20 and 50 day EMAs consistently, and it may yet again continue to do this.

If it begins to breakdown, then we have an opposite “fade” play, particularly with a trigger on a breakdown under the $22 level.

That’s the main way to use this scan – or at least is my interest in doing so.

Running this quick scan allows for two separate strategies:

1. Find powerful, impulsive stocks in uptrend where you can buy them on breakouts to new highs or retracements into support.

2. Find overextended stocks late in an uptrend that break down, where you play “fade” or reversal strategies.

Personally, I’m more of the “Find strength and play strength” strategy but there are many traders who have built their trading business by playing “fade” strategies from overextended stocks.

It’s like the logic “What goes up, must come down” or “The higher they rise, the harder they fall” – and while this logic is applicable to many things in life, it doesn’t always work in leading stocks – think Apple (AAPL).

For reference, the stock MOST under-extended from its 200 day SMA is Tellabs – TLAB – a technology company that just retested a new 52-week low today (as of March 21).

The same logic – in reverse – goes for most under-extended (or ‘overextended to the downside’) stocks as well.

With these type of scans, be aware that small share prices – like $5.00 – will overemphasize the percentage difference.

Anyway, the benefit of this type of simple screen allows you to make your own decisions, and presents you with names of stocks you might not otherwise find.

Corey Rosenbloom, CMT