Technical Naughty and Nice List

The market continues to provide an overall bullish tone for stocks as we head into the final days of 2010. While there are a growing number of companies that are stretching the limitation of their short-term bullish trends, there are others that are beginning to gain bullish momentum.

Those on The Street talk about the “golden cross” and “death cross” a lot. These crosses are signaled when a stock’s 50-day moving average crosses above (golden) or below (death) its respective 200-day moving average. These indications may be good for longer-term investors, but how about for shorter-term traders?

For short-term trades, we like to monitor the relationship between a stock’s 20- and 50-day moving averages. These faster moving trendlines tend to cross more often, providing more timely bullish and bearish signals for potential trades. For today, we think we’ll call them “silver” and “minor injury” crosses.

Technical ‘Nice’ List

Since the holidays have us in good spirits, let’s start with the “nice” list.�

The table below displays the top recent “silver crosses” from our database of more than 7,000 stocks. Each of these stocks have seen their 20-day moving average move above their respective 50-day moving average during the past week, signaling that an intermediate-term bull run is forming (or continuing after a rest).�

Closing prices as of Dec. 22

At the top of the “nice” list are Bank of America Corporation (NYSE: BAC), Micron Technology, Inc. (NASDAQ: MU) and Martek Biosciences Corp.� (NASDAQ:� MATK). These stocks, as well as the others on the list, appear to be on their best technical behavior, and should make good call option candidates.

Technical ‘Naughty’ List

Now, for the other side of the list — the potentially “naughty” stocks.

There are many ways to measure whether a stock is overbought or oversold. Typically, chart technicians will use a Relative Strength Index (RSI) calculation or similar method to gauge whether a stock has stretched itself too far and is due for a short-term pullback. While we like the RSI method, we also like to put together a measurement that is individual to each stock’s characteristics: Enter our unique 50-day premium measurements.

Put simply, our 50-day premium measurement calculation gauges the average daily difference between a stock and its 50-day moving average over the past year. We then filter our database for stocks that are currently at unusually large premium readings. These stocks are considered “overbought” and at risk of a regression toward the stock’s 50-day moving average.

Closing prices as of Dec. 22

At minimum, the stocks on this list — especially Jabil Circuit, Inc. (NYSE: JBL), Cemex SAB de CV (NYSE: CX) and Valero Energy Corporation (NYSE: VLO) — are ones that we would be closing out bullish (call) positions on, as it would appear that the short-term outlook would include a move back toward the stock’s 50-day moving average. More aggressive traders should consider this list of stocks as potential short (put option) plays.