PROTECTED SOURCE SCRIPT
The Homma Overextended Indicator
Updated
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).
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).
Release Notes
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