How to Interpret Relative Strength Line?

Investor Query: How to interpret the relative strength line on the charts?

MarketSmith India Response: 

A stock’s Relative Strength line compares a stock’s price performance versus a key index such as Sensex. When the line is sloping higher, it means the stock is outperforming the benchmark index; when it is moving sideways, it is more or less in line with the Sensex and when it is sloping downward, it is underperforming.

When a stock breaks out, the RS line should be poised to shoot into new high ground or at least be rising sharply. If the line is in new high ground ahead of its breakout — a rare sight — even better. The line is derived by dividing the stock price by the key index value.

Here is an example of a stock breaking out with Relative Strength line rising sharply:

TTKHealthcare_MarketSmithIndia

Do not confuse a stock’s Relative Strength line with MarketSmith India’s Price Strength rating. They are completely different. On a scale of 1 to 99 with 99 being the best, the Price Strength rating measures a stock’s price performance against all other stocks in the Indian market. A rating of 99 means the stock has outperformed 99% of all stocks based on 12-month price performance.

The above query was originally asked by a MarketSmith India user via the Ask MarketSmith feature.

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