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A Line & a dot: Can help you find winners

Posted Date: November 13 2020
“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
 
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 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.
 
RS strength (RS) 
 
“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
 
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 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 is a stock that is in the top 4% (100-96%) in terms of price performance. The higher the rating, the better is the price performance.
 
What to look for in an RS line or an 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 Rating registering a new high, is something that every technical analyst wishes for. An RS line hitting a new high means 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.
 
Example:
 
Navin Fluorine:

 
HDFC Bank:

MarketSmith India Blue Dot feature:
 
When Does Blue Dot Appear?
 
When a stock's Relative Strength line hits 52 weeks high AND When it builds a base pattern that signals a potential price jump OR When the stock is breaking out of the base.
 
When a stock reaches a new Relative Strength high and it’s simultaneously building a base, that’s a sign to add it to your watchlist right away. The Blue dot list is a list of stocks which are meeting this criteria. We would not call them as a recommendation to buy but this is the list which will help you identify the next potential breakouts or ideas ahead of time. We use it as a confirming tool or as a leading indicator while it's forming a base. This would give enough time to prepare for the potential breakout. Earlier we can get them on our radar, we get enough time to research and take a position at the right buy point / breakout.
 
Example:

Blue Dot List
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Examplea representative form or patternMore (Definitions, Synonyms, Translation)
 
 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.

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