From the desk of Steve Strazza @Sstrazza
We want to be buying stocks that are in the strongest uptrends. One way we identify them is by looking at momentum which we use the 14-day RSI for. The strongest uptrends do not get oversold, or fall to RSI levels below 30. In fact, the strongest uptrends often stay above the 40-50 level and constantly print overbought readings above 70.
The S&P 500 registered an extreme oversold reading below 20 during the violent correction that began in late February. Here’s a look.
Click on chart to enlarge view.
We also saw an extreme in the percentage of stocks hitting oversold which we detailed in a post this weekend. Now that we think things have washed out and we’ve made a tradeable bottom, we want to look underneath the surface at the stocks that showed strength during the recent selloff, as those are likely to be the best performers in the months/quarters ahead.
To do this, we made a watchlist of all the S&P 500 components that did not hit oversold during the recent correction. There were 120. That’s right, despite the extreme selling pressure last week, almost 25% of stocks stayed out of oversold territory.
Second, we filtered out any names that are currently in a bearish momentum regime. This means that even though they might not have hit oversold following the markets February 19th high, they were oversold more recently than they were overbought. That isn’t to say there might not be some good setups in those names, but the strongest structural uptrends don’t get oversold so that is where we want to focus for long opportunities.
Taking this one step further, we want to start with the names that have remained out of oversold territory for the longest as these are often the strongest and most resilient uptrends.
For this reason, the table of 98 stocks below is ranked by the number of days since momentum was last oversold.
Click on table to enlarge view.
I encourage you to check it out and filter the data by the other columns as well. What you will find is that many of the names at the top of the list have also been some of the best performers recently and are the closest to their 52-week highs. This supports our thesis that we can identify outperformers by scanning for them based on momentum.
After going through every component in the S&P 500 with a focus on those in the table above, we are recommending a handful of the best setups in the strongest stocks we could find right now.
If you want to guess, here is a hint… not only are they all in the table, but they are also towards the top of it.
Otherwise, to access our favorite setups in the S&P right now and all of our premium research, start your 30-day risk-free trial. Or sign up for our “Free Chart of the Week” to receive more free research like this.
Thanks for reading and please let us know if you have any questions!