Relative Strength Analysis

In This Lesson

Finding the strongest stocks in the market.

Duration: 25 min

Overview

Finding the strongest stocks in the market. This lesson will provide you with practical knowledge and actionable insights you can apply to your trading immediately.

By the end of this lesson, you'll have a clear understanding of the concepts and be able to apply them in real trading scenarios. Let's dive into the details.

Key Concepts

RS Line Calculation

Stock price divided by index price. Rising line = outperformance, falling = underperformance.

RS Rankings

Rank all stocks by performance over specific period. Top 20% are leaders.

Comparative RS

Compare stock to its sector, sector to market, market to bonds. Multi-level analysis.

RS Divergences

When price makes new high but RS doesn't, it warns of potential underperformance.

Practical Application

Now let's put this knowledge into practice. Follow these steps to apply what you've learned:

1. Calculate RS: divide stock price by SPY price, plot as line
2. Screen for stocks with RS line at 52-week highs
3. Compare stock RS to sector ETF RS for two-level analysis
4. Track top 10 RS leaders weekly - note which repeatedly appear
5. Set alerts when RS line breaks trend or makes new high/low
6. Combine RS with price action: buy pullbacks in RS leaders

Common Mistakes to Avoid

Using Price Instead of Relative Performance

A stock up 10% seems strong, but if market is up 15%, it's actually weak.

Single Timeframe Analysis

Daily relative strength can be noise. Missing the bigger picture leads to false signals.

Ignoring Relative Weakness

Only looking for strength misses profitable short opportunities in weak stocks.

Key Takeaways

Relative strength identifies tomorrow's winners today
Strong stocks get stronger - RS momentum persists for months
The best shorts show relative weakness before absolute weakness
Institutional money flows to relative strength leaders
RS works in all market conditions - bull, bear, or sideways

Your Next Steps

Ready to continue your learning journey? Here's what to do next:

• Review this lesson's key concepts
• Complete the practical exercises
• Take notes on what you've learned
• Practice with a demo account
• Move on to the next lesson when ready