Relative Strength

[Do Or Die 10]

Hi,

 

In my other thread http://www.traderslaboratory.com/forums/technical-analysis/10120-relative-strength-internal.html, I introduced the concept of RS. That one will be open for discussions relating to internal relative strength of a stock. In this one I will share some RS concepts which are used by professional investors worldwide. Unlike most of Technical Analysis, RS has been validated and accepted by academicians (the other two important concepts being momentum and mean reversion).

 

For Stocks RS is used to gauge their strength against the entire stock market (through SnP 500, DOW), or against their peer group. CANSLIM is a popular method which uses RS for investing.

 

RS for an industry group/sector is measured against the broader index to measure its upside potential. Sector Rotation Model is the most important work in this regards which shows how different stock sectors perform in different stages of the market.

 

There is a lot of stuff I plan to post related to RS; not just about stocks but all important asset classes; and not just about investing but different time frames for trading.

 

:missy:

DD

Edited June 29, 2011 by Do Or Die

[Do Or Die 10]

A basic example to get started:

 

In a rising market, most stocks will be dragged along with it and continue to rise. However, there RS may start showing weakness, which means that there is a loss in actual demand (buying) which is being marked by the favorable price increase of the stock. In reality the stock is not keeping with the rest of market, not even costing on the free ride given by the general bullish sentiment in the market. How serious this warning sign can be depends from case to case, because in longer time frames, each market cycle may be different from past ones. In general the stock is likely to ‘roll over’ down once the buying enthusiasm vanishes. In extreme cases, the stock will drop down like a stone once the market tops out.

 

Stock groups behave in a similar fashion. To profit from this analysis, you can exit with profit when the stock is peaking out and safeguard from the cash. Alternatively you can find good short/ultrashort ETFs and enjoy the crash.

 

The best example is the finance stocks which peaked out way before the market during the credit crisis. As seen in attached chart of BAC, its RS started to decline mid-2006, while the market peaked in late 2007.

 

The second chart is of YRCW, picked from discussion in the other thread: http://www.traderslaboratory.com/forums/technical-analysis/10184-am-i-doing-right.html#post121967. From prices alone it may seem that the stock is just moving up and down wildly, but the crushed RS indicates that the stock may be in BIG trouble.

 

:missy:

DD

Edited June 29, 2011 by Do Or Die

[zhaozilong 10]

Hello Do or Die,

 

 

can you comment how this lady derive her RS and her moneywave?

 

Joanne Klein (10 Per Page) - Public ChartList - Free Charts - StockCharts.com

 

thank you.

 

Hi,

 

In my other thread http://www.traderslaboratory.com/forums/technical-analysis/10120-relative-strength-internal.html, I introduced the concept of RS. That one will be open for discussions relating to internal relative strength of a stock. In this one I will share some RS concepts which are used by professional investors worldwide. Unlike most of Technical Analysis, RS has been validated and accepted by academicians (the other two important concepts being momentum and mean reversion).

 

For Stocks RS is used to gauge their strength against the entire stock market (through SnP 500, DOW), or against their peer group. CANSLIM is a popular method which uses RS for investing.

 

RS for an industry group/sector is measured against the broader index to measure its upside potential. Sector Rotation Model is the most important work in this regards which shows how different stock sectors perform in different stages of the market.

 

There is a lot of stuff I plan to post related to RS; not just about stocks but all important asset classes; and not just about investing but different time frames for trading.

 

:missy:

DD

[Do Or Die 10]

Hello Do or Die,

 

 

can you comment how this lady derive her RS and her moneywave?

 

Joanne Klein (10 Per Page) - Public ChartList - Free Charts - StockCharts.com

 

thank you.

 

Hi,

 

The RS is probably calculated by comparing to market index & peer stocks/etfs. I will have to study atleast 20 charts of her to decrypt it- doubt if it will worth the effort.

 

The "Money Wave" is nothing more than a slight variation of popular stochastics :rofl: (see attached)

 

:missy:

DD

[Do Or Die 10]

Attached is a good reference for Sector Rotation. I will post some RS strategies when there is sufficient interest or I get some free time.

[zhaozilong 10]

Hi,

 

The RS is probably calculated by comparing to market index & peer stocks/etfs. I will have to study atleast 20 charts of her to decrypt it- doubt if it will worth the effort.

 

The "Money Wave" is nothing more than a slight variation of popular stochastics :rofl: (see attached)

 

:missy:

DD

Hello Do or Die,

 

i will really appreciate it if you can shed some light on how she create her indicators in the chart.

 

thank you

 

-zhaozilong

[Do Or Die 10]

Hi Zhaozilong,

 

Her RS rating is basic- compare a stock against SnP AND it's sector index. Refer to the YRCW example in second post.

[Do Or Die 10]

i will really appreciate it if you can shed some light on how she create her indicators in the chart.

 

To Clarify:

 

She is a paid member of stockcharts.com and can create custom indicators but you cannot.

 

You can go to any charting website like freestockchart.com and can plot Stochastics with parameters (8,3) to replace her Money Wave.

 

For Relative Strength score refer to YRCW example and my methodology in this post. You can see in the latter example that I posted a list of stocks based on how they have performed relatively during a certain time interval. She is doing exactly the same with an added thin layer for discretionary analysis.

 

As an advice stop hunting for the easy way- plotting the holy grail indicator. Try to work out the methodology- its all basics.

[Do Or Die 10]

Okay, I've quantified the concepts discussed in this thread and the RS-Internal one. The three most important factors have been quantified on a scale of -100 to +100. (-100 means extremely bearish while +100 means extremely bullish). There are no fancy formulas used, just the concepts I've stated so far.

 

This is the market state for yesterday close. The RS internal anticipates the immediate move, while the RS with respect to S&P suggests how stronger the mid-term trend is.

 

Comments welcome!

 

[Do Or Die 10]

Some changes:

 

• I found a problem with my earlier normalization method and rectified it (has no change on overall view)
  
• Added some colors for easier visualization
  
• Would like to add peer group comparison (currently its only with broad market)
  
• Would like to refine internal rs
  

 

[Do Or Die 10]

DJI Components Overview:

 

• Trend Strength refers to mid-term trend (similar to 50 day moving average)
  
• RS Internal refers to immediate expected movement
  
• RS (S&P) refers to how well the sector is performing relative to overall market
  
• -100 means extremely bearish and +100 means extremely bullish
  

 

 

 

Edited August 26, 2011 by Do Or Die

[kidpwrtrader 10]

Hi do or die,

 

I have been trading some variation of CANSLIM with technicals for around a year at this point.

 

Sector rotation with ETFs is interesting and has been validated through many different groups of people (as you mentioned) backtests.

 

What I am wondering is, to catch the large return potential of equities in the CANSLIM universe, could one employ a top down rotation strategy rotating every month into the top 3 sectors and within each sector into the top 1 or 2 stocks?

 

Looking forward to a reply as well as recomendation where I can obtain any relevant literature.

 

 

Thanks.

[Do Or Die 10]

Kidpwrtrader,

 

I'm a little confused by your statement... canslim is not that effective if the stocks are rotated every month, it is used for investing.

 

Regarding resources for research- I cannot recall any. In any case, each business cycle is different in form from the previous one, so theory may not help. You must be tracking stocks and sectors performance, that should help much.

 

BTW Piotroski Score may be of interest:

Piotroski Profits - Forbes.com

The Piotroski Score

[kidpwrtrader 10]

You created a thread rotating ETFs. I was wondering if the concept could be applied to rotating the strongest stocks within the strongest Equity ETFs.

 

Thanks for the links.

[Do Or Die 10]

Yes Kidpwrtrader, but I also mentioned that it is for the sake of illustrating the 'edge' or advantage sector rotation provides. People tend to invest in broad market indexes- sector rotation through ETFs definitely goes better than that.

 

But you are one step ahead- tracking individual stocks and not just sector indices. So if you have found a good stock, it's better to hold it unless it hits a trailing stop-loss, or it nullifies the premise on which you invested in the first place. BTW I do not mean trailing stops similar to short-term trading; when we buy a stock for gains over 100% a 30% trailing stop should be good as well.

 

Monthly ETF rotation is for people who cannot afford more than 30 minutes per week or who are absolutely new to stock market.

[kidpwrtrader 10]

Will you be going over this type of investing/trading in addition to the material you currently presented? I would be interested in seeing some insight...

[Do Or Die 10]

Will you be going over this type of investing/trading in addition to the material you currently presented? I would be interested in seeing some insight...

 

See last few posts for example. http://www.traderslaboratory.com/forums/technical-analysis/10509-moment-truth-stock-investors-4.html#post126037

 

As the market stabilizes, Technology and Financials will outperform- they did last week and will continue so until S&P starts crashing again. IBM and AAPL both look good for short-term. For 2-3 months holding, many ETFs mentioned here were selling cheap, so no harm in buying the moment market takes support.

 

Currently I have hardly 20% of money in pure investments, rest is short-term to mid-term trading.

[r4bb1t 10]

Hi Do Or Die.

relative strength between entire market and a single stock can be done by simple dividing.

but how to calculate comparative relative strength?

i mean normalization to compare the relative strength of two different stocks.

i've tried 'ROC of Stock / ROC of Entire Market' to achieve this but no luck.

i'm asking that how William O'neil calculated the relative strength score.

Thanks

[Do Or Die 10]

i mean normalization to compare the relative strength of two different stocks.

i've tried 'ROC of Stock / ROC of Entire Market' to achieve this but no luck.

i'm asking that how William O'neil calculated the relative strength score.

Thanks

 

Say you want to compare RS for last 30 days. First calculate % change of stocks in last 30 day . With this data alone you can rank stocks by their relative performance. For a more 'visual' RS score, subtract that by % change of base index in last 30 days.

 

I prefer subtraction to division because division tends to unnecessarily amplify relative performance. I do not recall how O'neil calculates but this is what it is.

 

BTW, are you calculating it in Excel?

[r4bb1t 10]

BTW, are you calculating it in Excel?

 

Thanks for answer.

No i've plotted the RS indicator below price as stockcharts does.

it works pretty good for a single stock. but doesn't work for comparing plural stocks

however i prefer to plotting moving averages of RS together as we normally do on price.

i don't buy stocks when their RS is below 200MA of RS

[Do Or Die 10]

Excel can be really good... you can get all data from yahoo and templates are around the web for popular indicators. If you can afford some time to learn get a strategy design software like Ninjatrader.

[carltonp 10]

Say you want to compare RS for last 30 days. First calculate % change of stocks in last 30 day . With this data alone you can rank stocks by their relative performance. For a more 'visual' RS score, subtract that by % change of base index in last 30 days.

 

I prefer subtraction to division because division tends to unnecessarily amplify relative performance. I do not recall how O'neil calculates but this is what it is.

 

BTW, are you calculating it in Excel?

 

Hello DorD

 

I was wondering if you could provide an example using a simple calculation? I do use Excel

 

Cheers mate

[Do Or Die 10]

I was wondering if you could provide an example using a simple calculation? I do use Excel

 

"Say you want to compare RS for last 30 days. (Simply) calculate % change of stocks in last 30 day . With this data alone you can rank stocks by their relative performance. For a more 'visual' RS score, subtract that by % change of base index in last 30 days.

 

I prefer subtraction to division because division tends to unnecessarily amplify relative performance."

[carltonp 10]

OK DorD,

 

So how does one use that data alone to rank stocks by their relative performance

[Do Or Die 10]

The stock with the best performance is relatively strongest; the stock with 5th best performance has RS rank of 5 and so on

 

To plot RS as an indicator, most software use the formula= Stock_Price/Base_Index_Price *100