The Homma Overextended Indicator

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How do you define over-extendedness?
To define over-extendedness, you must first quantify extension.

The most common way is to measure the stock price (usually closing but one can also use the high/low) distance away from its moving average.

The common moving averages that are used are the usual suspects as below:

9ema/10sma

20sma/21ema

50sma

200 ema/sma

let’s measure how extended is LICI from these MAs right now.

It is ~13, 15, 30, and, 64% extended from its key MAs.

Here comes the trick question.

How do you know if this is under-extended and could get extended further, or if it is extended significantly more than what LICI does on average?

The answer is not a constant.

It varies from stock to stock.

For example, a high Beta stock (generally the small and midcaps) can be extended 10% from 50sma and that would be normal, whereas a low Beta stock (generally most large caps) extended by the same degree might be a sign that it will retrace back to its mean.

Over-extendedness for the same stock can be different in different market conditions.

But how?

Because, in trending (bullish or bearish) conditions, the swings are higher compared to in a sideways market.

Also, since “distance away from its moving average (in %)” can have a huge spread and is an arbitrary number. A better way is to express this “distance away from its moving average (in %)” as a multiple of its ATR.

Example:

Stock A: ATR = 2%

Extension = 20% from 20sma

Better way = 20/2 = 10X-ATR extended.

Low Beta stocks (low volatility stocks) will mean revert from a low multiple extension, while, high Beta stocks do so after a higher multiple extension.

“BUT BRO,

You still haven’t told me, how much is high and how much is low.”

I haven’t.

But read on.

whats overextended for Homa
For the kind of stocks I trade,

Microcaps and smallcaps (high Beta stocks, high ATR), this is what I consider over-extended (from observation and my experiential learning only):

close price extended more than 6X ATR(14) from 20sma.

What’s over-extended for these super traders?
Dan Zanger: 20% from 200sma (daily).

Rai from Traderlion: 10% from 8ema (daily).

Suresh Garu (Twitter): 100% from 40ema (weekly).

Jeff Sun (twitter): 6X ATR(14) from the 50ema (daily).

Oliver Kell: 140% above 200 sma (daily).

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Note di rilascio

change SKBN to 200ema

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Note di rilascio

added table position change option

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Note di rilascio

added option to change the ATR multiplier