Relative Strength Charts

May 18, 2007: 1:27 PM CST

Although I don’t incorporate stock relative strength charts as much as I should, I am going to begin posting more on this concept as I better understand the implications that can be interpreted from adding this additional tool to the analysis arsenal.

Relative strength charts compare price change relative to another security (or index or asset class).  The concept of relative strength is important because time is money, and while you may be making a decent return on your trades/investments, you could potentially increase your returns by studying sector strength and stock strength within a given sector.

Here are two examples of stock comparison within an industry group.

Both Apple and Microsoft are heavily followed stocks, but quick, tell me which one would have made you more money in the recent past?

aapl-to-msft.png

The answer clearly is Apple (AAPL) because of the strong move it has experienced recently relative to Microsoft’s move.  This implies that newer technology and an alternative to ‘big Microsoft’ could continue to outperform.

Let’s look at another example between two major search engines.  Between Google and Yahoo, which do you think would have performed better recently?  I suspect most people would say Google because of its behemoth status as a stock and company.  Let’s look closer:

yhoo-to-goog.png

Actually, Yahoo would have been the better choice this year, in that its price appreciated stronger than Google’s (recently).  Of course, these stock prices are dramatically different (Google at $470, Yahoo at $30), yet when compared from a percentage standpoint, you would have been better off in the smaller, less hyped Yahoo (recently).

There is so much to be said on this topic, and I recommend studying more and playing around with as many relationships as you can imagine.

In StockCharts, to find relative strength charts, select Performance (as the chart type) and type symbols in this format:

GOOG:YHOO or DIA:QQQQ

The colon character will set-up the chart and the percentage change will allow you to compare relevant differences.

9 Comments

9 Responses to “Relative Strength Charts”

  1. BILL KEMPERMAN Says:

    Hey Corey –
    Thanx for posting this . I like it when you ask questions . Good chart examples too. Relative strength study is imperative to trading success . I have found the two sites listed below very helpful for same . I do have a question though . RSI can be calculated using any time length . Standard seems to be 14 (mov avg)? Is there another time frame any have found that works better for them. Good skill to all. Thanks . Bill

    Sort by relative strength in price , earnings or sales – mg top stocks
    MarketGauge.com
    http://tinyurl.com/2l2jg8

    Sector lists – Click on sector , on sector list page sort column with Relative strength heading for a top down look
    Barchart.com

    http://tinyurl.com/6jmzr

  2. Corey Says:

    Hey Bill – thank you for your comment.

    These sites are amazing in terms of ease of use and critical information for easy sorting/understanding of the current environment. Thank you so much for sharing them. I will be studying them in more detail this weekend.

    I ask the questions because I had the wrong assumption as well until I viewed the charts. “Bigger” (cap) is not always better in terms of stocks/companies. Comparisons will show the relation.

    In terms of RSI – Relative Strength Index – it is actually of little relation between stocks. The RSI (developed by Welles Wilder) is an indicator that measures up days vs down days and the magnitude between these in an attempt to highlight overbought or oversold technical conditions. I suppose it’s misnamed when compared to measuring “relative strength” of stocks or indexes.

    I do use the RSI (I prefer the Stochastic, personally), and the RSI indicator can be used as well to analyze divergences and trendline breaks. Correct, the standard input setting is 14.

    I typically study the RSI with the 9 period look-back. Some people actually use a 2 period RSI for extremely reactive conditions and observations. Some use a 21 period RSI look-back period.

    The general rule is the following (and is true with most indicators): The longer the period, the more valid the signal, but fewer signals will occur. The shorter the period, the more signals will occur, but the less reliable they will be (they will lead to whipsaws).

    It really helps if you have access to data testing software (I use TradeStation) to see how various inputs would have reacted to different timeframes and stocks. TradeStation (and I suspect others) uses an “optimize” feature which allows you to compare many inputs (look-back periods) when testing an indicator. I recommend this if possible. Guard against over optimization, and realize that this is helpful (optimization) but will not provide the holy grail.

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