“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 Relative Strength 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?
Example: As indicated in the chart, Dixon Technologies had an upward trending RS line and the RS Rating was near its all-time high when it broke out from a cup-with-handle base in June. The stock also had high blue dot count (Blue Dot means Relative Strength line hits 52 weeks high. To learn more about MSI Blue Dot feature, visit https://marketsmithindia.com/mstool/blueDot.jsp#/)
Read our last week’s learning article: What’s a Follow-through Day?