Lesson in Relative Strength Breakouts in India Nifty INDY

Aug 25, 2010: 2:04 PM CST

India’s Nifty 50 stock market index – symbol $CNXN in StockCharts.com – has been outperforming the S&P 500 not just in 2010, but off the March 2009 stock market lows.

There’s a helpful indicator or tool that doesn’t seem to be discussed all that much anymore that reveals comparative strength between markets.  It’s the Relative Strength tool (not the RSI) and it’s been making breakout after breakout along the ride higher in the Nifty Index.

Let’s take a look at the Weekly and Daily Nifty chart and see its Relative Strength to the S&P 500 and focus on the breakout RS signals that have occurred just prior to breakout moves in the index.

This principle applies to all markets and stocks – even if you don’t follow the India’s market.

First, the Nifty Weekly:

In the top chart we have the Nifty ($CNXN) chart price and standard moving averages.

In the indicator panel, I’m showing the Relative Strength of the Nifty to the US S&P 500.

To create your own relative strength chart, type in the first symbol you want to reference – in this case $CNXN and then the second signal – usually a market index – you wish to compare it – in this case the $SPX.

There’s a formula you must use and it’s like this:

$CNXN:$SPX

A colon divides the two symbols.  Other software programs may have different ways to display Relative Strength charts.

When the RS line is flat, it means that both markets are doing the same thing – performing in line with each other – neither is stronger or weaker.

When the RS line is rising, it means the first symbol (the numerator in a division fraction) is outperforming the second symbol (the denominator in a fraction).  Thus, the first market is showing “Relative Strength” to the second when the line is rising.

And of course, if the line is falling, it means the first symbol is underperforming the second symbol.

The Nifty and the S&P 500 traded in line with each other for most of 2008 and into 2009 – both falling together – but the Nifty suddenly began rising steadily from October 2008, eventually breaking out of its Relative Strength trend channel in March 2009.

Almost immediately after breaking the relative strength horizontal trendline, the Nifty index rallied sharply, further outperforming the S&P 500.

Then, both markets performed similarly through the remainder of 2009 into 2010 – both rising in 2009 and then rising then falling in 2010 together.

But wait – the Nifty began rising in April and then broke out again from the relative strength horizontal trendline in May 2010.

In fact, let’s now zoom in to see that closer:

This time, I’ve added the actual S&P 500 index to the middle panel and kept the same Relative Strength graph on the bottom.

This way you can compare how the Nifty and S&P move together and what it means when the RS line is rising – or consolidating.

By the way, if you wish to trade the Nifty Index, you can use the ETF with symbol INDY – it’s relatively new.

The Nifty and the S&P 500 performed almost exactly – rising and falling together – until the Nifty broke the RS trendline in late May 2010.

Once again, immediately after the breakout, the Nifty index surged higher while the S&P 500 traded flat to lower, causing the RS line to rise sharply.

During July, the RS line declined but recently – in August – the Nifty broke out again from a parallel RS trend channel sharply as the Nifty rose the last few days while the S&P 500 sold-off.

As long as the RS line continues rising, we can assume the Nifty will continue outperforming the S&P 500.

Keep in mind that the Nifty is at fresh new recovery highs (actually, not that far from its 2007 peak of 6,300) while the S&P 500 is down about 14% from its 2010 new recovery high, and still 33% down from its 2007 peak of 1,576.

This pair example shows how to use Relative Strength analysis – and again you can do so with a particular stock to the S&P 500 (or NASDAQ), or other market to the S&P 500… or other overseas markets to each other.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

8 Comments

8 Responses to “Lesson in Relative Strength Breakouts in India Nifty INDY”

  1. Impressed Says:

    Ingenious.

    Thanks Corey!

  2. Tarique Anwar Says:

    Nice Post Corey.I have also posted something like this few days back (http://technically–speaking.blogspot.com/2010/…) with the concern that Nifty's out-performance can well end as it (the ratio) can very well revert to mean in coming weeks. What is your opinion about a market that is relatively small and breaking out and away from the majors.

  3. jt Says:

    why do you tech instead of trading?; i also would like to ask what is your track record?

  4. Corey Rosenbloom, CMT Says:

    That's possible too – but Relative Strength relationships don't always have to revert to the mean, especially when one component breaks away or structurally changes – then the relationship will continue for quite some time.

    That's why it can be helpful to follow relative strength trendlines and note breaks in the RS line to denote likely changes ahead.

  5. Corey Rosenbloom, CMT Says:

    The lessons/daily commentary is a formalized way for me to present information I'm considering and get feedback – plus I learn the concepts better when I explain them and doing so has helped my trading over time, both through learning concepts better and by making connections with other bloggers/colleagues in sort of a virtuous circle.

  6. Gaurav_verma83 Says:

    Thanks for the analysis

  7. Marketcalls Says:

    Hi Corey,
    Looks Like major supports for Dow Jones has been broker. Whats you view on india. Still Nifty holds the Supports…. Will the correlation between nifty and Dow Jones remain low in coming month?

  8. Marketcalls Says:

    Thanks Corey for your quicker view on Nifty