Are you tired of watching your stocks lag behind the market, even on days when the indexes are soaring? Do you find yourself wondering how to identify the true leaders in any market condition? Get ready to unlock the secrets of relative strength, a powerful concept that separates the winners from the losers in the world of trading. In this blog, we’ll walk you through four proven methods to identify stocks with superior relative strength, giving you the tools to supercharge your trading and leave the competition in the dust. Plus, stick around to the end where we’ll share a bonus tip on how to combine these techniques for even more explosive results.
What is Relative Strength?
Imagine a rising tide that lifts all boats. But some boats rise faster than others. Relative strength helps you spot those fast-rising vessels in the stock market. It’s about comparing a stock’s performance to a benchmark, typically the S&P 500 index. When a stock consistently outperforms the market, it’s a sign of relative strength.
I’m Rick Pedicelli, head stock analyst at Morpheus Trading, and I’ve been mastering the art of trading for over 20 years. If you’re ready to take your trading to the next level with the power of relative strength, hit that like button and subscribe to our channel for more cutting-edge insights like this.
Let’s dive in and discover the four powerful ways to identify relative strength in your trading
4 Ways to Identify Relative Strength
1, Pattern Relative Strength
The first technique we’re going to explore is pattern relative strength, which involves comparing a stock to an index. This is a simple yet effective way to gauge how well a stock is holding up relative to the overall market.
Higher Lows vs. Lower Lows: When a stock sets higher lows while the index is setting lower lows, it indicates that the stock is holding its ground or even gaining strength as the broader market weakens. For example, let’s look at Cava. While the S&P 500 was setting lower lows, Cava remained relatively sideways, showing resilience in a declining market.
Reclaiming Moving Averages: Another sign of pattern relative strength is when a stock reclaims key moving averages (like the 50-day or 200-day MA) ahead of the index. For instance,Oscar Health (OSCR). While the S&P 500 was rolling over, OSCR held its ground and set higher lows. This behavior is a strong indication of relative strength. Additionally, if a stock reclaims the 50-day or 200-day moving average ahead of the index, it’s another sign of relative strength. For instance, OSCR reclaimed the 50-day moving average on April 16th, precisely when the S&P 500 was breaking down below its 50-day moving average.
Breakouts: A stock breaking out to new highs ahead of the index is another indicator of relative strength. Oscar broke out around May 7th while the S&P was just starting to reclaim its 50-day MA.
2, Relative Strength (RS) Line
Next up is the RS line, a visual tool that makes it easy to see how a stock is performing relative to an index.
Understanding the RS Line: The RS line is simply the price of the stock divided by the price of the S&P 500 on a closing basis. When the RS line is moving in sync with the stock price, it indicates the stock is performing as well as the index. If the RS line is outperforming, it shows the stock is doing better than the index.
Practical Examples: For example, with Cava, the RS line was setting higher lows even when the stock price was not, indicating underlying strength.
Similarly, APP showed relative strength during a market correction with its RS line making higher lows while the stock price made lower lows.
3. Relative Strength Ranking
The RS ranking is a numerical score that ranks stocks based on their performance relative to the entire market over a specific timeframe. This ranking, popularized by Investor’s Business Daily (IBD), ranges from 1 to 99, with 99 being the highest.
Using RS Ranking: We use the RS ranking in TC2000, which offers similar functionality to IBD. For instance, PSTG has an RS ranking of 98, meaning it’s outperforming 98% of all other stocks. We generally look for stocks with an RS ranking above 85, with anything above 95 being particularly strong.
Comparative Examples: Tesla, with a low RS ranking of 23 due to its downtrend since last July, contrasts sharply with stocks like SG, which boasts a perfect RS ranking of 99 thanks to its strong performance.
4. Percent Move Off the Low
Our final method, percent move off the low, measures how much a stock has moved off its recent lows compared to the S&P 500 during a new rally attempt.
Measuring Performance: We compare the stock’s move to the S&P 500’s move during the first few weeks of a rally. For example, if the S&P is up 4%, we look for stocks that are up at least 8%, often finding the best candidates up three times as much as the S&P.
Identifying Leaders: In practical terms,
-Cava’s 20% move during a 4% S&P rally,
-PSTG’s 14% move against a 5% S&P rally,
-Oscar’s 30% move during a similar period, all demonstrate substantial relative strength.
The Synergy of Strength: Combining Techniques for Explosive Results
The beauty of relative strength is that it’s most potent when multiple techniques point to the same conclusion. Imagine CAVA with an RS rating of 98, an RS line making new highs before the price, and the stock price holding above key moving averages while the market crumbles. That’s a symphony of relative strength, a strong indication that CAVA could be a future market leader.
Key Takeaways
Master relative strength to identify stocks with superior performance compared to the market.
Leverage pattern recognition to spot stocks forming bullish patterns while the market weakens.
Utilize the RS line to gauge a stock’s relative strength with greater precision.
Employ RS ratings to find stocks leading the pack in terms of overall performance.
Use the percent move off the lows to identify early breakouts during market rallies.
Combine Techniques: The true power of relative strength comes when multiple signals align. For instance, Cava demonstrated multiple forms of relative strength: it had a high RS ranking, its RS line was outperforming, it was setting higher lows, and it reclaimed key moving averages ahead of the S&P.
Practical Application: Apply these techniques in your trading to identify potential market leaders. The RS ranking and RS line are quick ways to scan for strong stocks, while pattern relative strength and percent move off the low provide deeper insights into a stock’s resilience and performance.
Continuous Learning: Always test these methods in your trading to see how they fit your strategy. Relative strength can be a game-changer when used correctly.
Remember, knowledge is power in the trading world. By incorporating these relative strength techniques into your trading arsenal, you’ll be well-equipped to find winning stocks and outperform the market. So put these methods to the test, and experience the difference relative strength can make in your trading journey!
Conclusion
There you have it, four powerful techniques to identify relative strength in your trading. Don’t just take our word for it—put these methods to the test in your own trading and see the difference they can make. If you want to dive even deeper into the world of relative strength and other advanced trading concepts, we invite you to join Morpheus Trading Academy as a VIP founding member. As a VIP member, you’ll gain access to our cutting-edge training materials, live trading sessions, and a community of like-minded traders all working together to achieve their financial goals. To learn more and secure your spot, just click the link in the description below. And before you go, be sure to check out the two other videos we’ve handpicked for you. These videos will help take your understanding of our proven swing trading strategies to the next level. Remember, the key to success in trading is to never stop learning and growing. So keep exploring, keep pushing yourself, and most importantly, trade with confidence. We’ll see you in the next video.
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