Why the Relative Strength Line/Rating Holds a Big Clue?

“Relative price performance is a good way to tell which of the five or six stocks you own is your true leader. If you’re going to do any selling, it’s normally correct to weed the flower patch by selling your worst-performing stocks first.” – William J. O’Neil, MarketSmith Founder

Have you ever noticed how the price performance of a good stock moves in tandem with the market? Often stocks that drive the market are “Leaders” and tend to show superior price performance. This can be traced in the Relative Price Strength (RS) line of a stock’s chart. The Relative Strength we are looking at here is not to be confused with another popular technical analysis tool, Relative Strength Index (RSI), which is used to measure the momentum. The RS of a stock measures its relative price performance over the last 12 months with respect to the rest of the stocks in the market. An RS rating is also provided for a stock based on a percentile system. A stock with an RS rating of 96 indicates that it outperforms 96% of the stocks in the market with respect to price, or alternatively – it happens to be a stock that is in the top 4% (100-96%) in terms of price performance. Higher the rating, better the price performance.

What to look for in an RS line or a RS rating?

– When a stock is breaking out of its resistance, a rising RS Line is a healthy indicator, suggesting that its price performance is trending higher.

– A breakout that happens on an RS line, which is trending higher, coupled with the RS making a new high, is something that every technical analyst wishes for. An RS line hitting a new high means that the stock is leading the market like never before – a very bullish sign.

– During instances when the market direction is weak and is in a correction – a rising RS Line indicates superior price performance as the stock is bucking the market trend or resisting it. Is it sufficient if just the RS line is trending higher? No. There is another RS line known as the RS line 2, which plots the price performance of a stock with respect to only its industry peers (as against RS line 1, which uses the stock market in general). If the RS line 1 is trending upward, and the RS line 2 is trending downward, you might be looking at laggard, which is rising just owing to the industry group doing well. Both RS lines trending upward would be the ideal scenario.

Here is a recent example of one of our stocks from portfolio:

To continue reading, Buy Premium Access

 

One Reply to “Why the Relative Strength Line/Rating Holds a Big Clue?”

  1. If you are in a down market, and you’re watching for RS Line New High, how far back is this indicator looking to call it a new high. One week, one day, or one year?

Leave a Reply

Your email address will not be published. Required fields are marked *