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Old 06-29-2011, 08:57 AM   #1

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Relative Strength

Hi,

In my other thread http://www.traderslaboratory.com/for...-internal.html, I introduced the concept of RS. That one will be open for discussions relating to internal relative strength of a stock. In this one I will share some RS concepts which are used by professional investors worldwide. Unlike most of Technical Analysis, RS has been validated and accepted by academicians (the other two important concepts being momentum and mean reversion).

For Stocks RS is used to gauge their strength against the entire stock market (through SnP 500, DOW), or against their peer group. CANSLIM is a popular method which uses RS for investing.

RS for an industry group/sector is measured against the broader index to measure its upside potential. Sector Rotation Model is the most important work in this regards which shows how different stock sectors perform in different stages of the market.

There is a lot of stuff I plan to post related to RS; not just about stocks but all important asset classes; and not just about investing but different time frames for trading.


DD

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Old 06-29-2011, 09:03 AM   #2

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Re: Relative Strength

A basic example to get started:

In a rising market, most stocks will be dragged along with it and continue to rise. However, there RS may start showing weakness, which means that there is a loss in actual demand (buying) which is being marked by the favorable price increase of the stock. In reality the stock is not keeping with the rest of market, not even costing on the free ride given by the general bullish sentiment in the market. How serious this warning sign can be depends from case to case, because in longer time frames, each market cycle may be different from past ones. In general the stock is likely to ‘roll over’ down once the buying enthusiasm vanishes. In extreme cases, the stock will drop down like a stone once the market tops out.

Stock groups behave in a similar fashion. To profit from this analysis, you can exit with profit when the stock is peaking out and safeguard from the cash. Alternatively you can find good short/ultrashort ETFs and enjoy the crash.

The best example is the finance stocks which peaked out way before the market during the credit crisis. As seen in attached chart of BAC, its RS started to decline mid-2006, while the market peaked in late 2007.

The second chart is of YRCW, picked from discussion in the other thread: http://www.traderslaboratory.com/for...tml#post121967. From prices alone it may seem that the stock is just moving up and down wildly, but the crushed RS indicates that the stock may be in BIG trouble.


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Relative Strength-bac.png   Relative Strength-yrcw.png  

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Old 06-29-2011, 10:51 PM   #3

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Re: Relative Strength

Hello Do or Die,


can you comment how this lady derive her RS and her moneywave?

Joanne Klein (10 Per Page) - Public ChartList - Free Charts - StockCharts.com

thank you.

Quote:
Originally Posted by Do Or Die »
Hi,

In my other thread http://www.traderslaboratory.com/for...-internal.html, I introduced the concept of RS. That one will be open for discussions relating to internal relative strength of a stock. In this one I will share some RS concepts which are used by professional investors worldwide. Unlike most of Technical Analysis, RS has been validated and accepted by academicians (the other two important concepts being momentum and mean reversion).

For Stocks RS is used to gauge their strength against the entire stock market (through SnP 500, DOW), or against their peer group. CANSLIM is a popular method which uses RS for investing.

RS for an industry group/sector is measured against the broader index to measure its upside potential. Sector Rotation Model is the most important work in this regards which shows how different stock sectors perform in different stages of the market.

There is a lot of stuff I plan to post related to RS; not just about stocks but all important asset classes; and not just about investing but different time frames for trading.


DD
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Old 06-30-2011, 08:09 AM   #4

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Re: Relative Strength

Quote:
Originally Posted by zhaozilong »
Hello Do or Die,


can you comment how this lady derive her RS and her moneywave?

Joanne Klein (10 Per Page) - Public ChartList - Free Charts - StockCharts.com

thank you.
Hi,

The RS is probably calculated by comparing to market index & peer stocks/etfs. I will have to study atleast 20 charts of her to decrypt it- doubt if it will worth the effort.

The "Money Wave" is nothing more than a slight variation of popular stochastics (see attached)


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Old 08-12-2011, 03:12 AM   #5

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Re: Relative Strength

Attached is a good reference for Sector Rotation. I will post some RS strategies when there is sufficient interest or I get some free time.
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Old 08-23-2011, 10:15 AM   #6

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Re: Relative Strength

Quote:
Originally Posted by Do Or Die »
Hi,

The RS is probably calculated by comparing to market index & peer stocks/etfs. I will have to study atleast 20 charts of her to decrypt it- doubt if it will worth the effort.

The "Money Wave" is nothing more than a slight variation of popular stochastics (see attached)


DD
Hello Do or Die,

i will really appreciate it if you can shed some light on how she create her indicators in the chart.

thank you

-zhaozilong
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Old 08-23-2011, 11:03 AM   #7

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Re: Relative Strength

Hi Zhaozilong,

Her RS rating is basic- compare a stock against SnP AND it's sector index. Refer to the YRCW example in second post.
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Old 08-23-2011, 09:51 PM   #8

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Re: Relative Strength

Quote:
Originally Posted by zhaozilong »
i will really appreciate it if you can shed some light on how she create her indicators in the chart.
To Clarify:

She is a paid member of stockcharts.com and can create custom indicators but you cannot.

You can go to any charting website like freestockchart.com and can plot Stochastics with parameters (8,3) to replace her Money Wave.

For Relative Strength score refer to YRCW example and my methodology in this post. You can see in the latter example that I posted a list of stocks based on how they have performed relatively during a certain time interval. She is doing exactly the same with an added thin layer for discretionary analysis.

As an advice stop hunting for the easy way- plotting the holy grail indicator. Try to work out the methodology- its all basics.
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