Relative Strength (RS) Basics

What is Relative Strength? How to identify it.

Focusing on stocks exhibiting strong Relative Strength (RS) is one of the keys to achieving superior returns. This is one of the core ideas of #CANSLIM.

In one sentence, showing RS means outperforming other stocks both during market uptrends and downtrends.

In this post, we will cover examples, how to spot it, and how to use it to make sure you are in the top stocks. If you want to outperform the indexes, logic says you have to be invested in stocks doing the same.

First Some Basic Terminology:

RS Rating

IBD’s proprietary measure of RS scored 1-99. Stocks with an RS rating of 80 have outperformed 80% of stocks over the past year.

RS Line

The Line plotted by dividing each day’s stock price/ price of the SPX.

Relative Strength Basics


The value of the RS line itself does not mean anything, but the trend of this line is very important. – Note RSI (Relative strength index) is something completely unrelated to the concept of this post.

RS is the result of supply and demand. Stocks with poor RS are in a distributive phase by major players and institutions. During corrections, such stocks will be sold first instead of accumulated. IBM is an example of poor RS. RS rating: 7, decreasing RS line.

Low Relative Strength Rating


Strong RS on the other hand is shown by stocks that are under accumulation. Funds are tripping over each other to build positions. This results in the stock price being “supported” even during market turbulence. NET is an example RS rating of 98, rising RS line, and # of funds.

Relative Strength Basics NET Chart


It is also important to compare the price action to that of the overall market. If AAPL has a daily CR of 85% when the SPY has a DCR of 15%, that is a clue that AAPL is outperforming within that time frame. This is a sign of Relative Strength.

So how can you identify Relative strength?

There are many different ways summarized extremely well by @duckman1717 in the document below and I will expand on a couple of these concepts.

Duckman Relative Strength Techniques

1st Case Study: TSLA

  • TSLA makes a higher Low when the SPX makes a lower one
  • Stays above 200day SMA while SPX undercuts by 28%
  • The Leaders often bottom before the indexes
  • TSLA increased 800% from this point in 9 months
Relative Strength TSLA Chart


2nd Case Study: DOCU

  • Higher Low again
  • RS Line hitting new all-time highs during the correction
  • Strong bounce once market pressure lifts
  • Broke out to new all-time highs shortly after correction
  • DOCU increased 120% in 3 months
Relative Strength DOCU Chart


3rd Case Study: NIO

  • Trends above all Key Moving Averages
  • RS Line in Uptrend
  • Forms Tight Price areas then breaks out.
  • Pullbacks are on lower volume than advances
  • Increased 1000% in 6 months while trending with the 21ema
Relative Strength NIO Chart


4th Case Study: FTCH

  • Breakout on large volume to all-time highs
  • Many up days in a row
  • Upside reversals near the bottom of price consolidations
  • Tight price action during correction and right before BO
  • Increased 100% in 1.5 months from the breakout
Relative Strength Chart FTCH


5th Case Study: CRSR

  • Red to green move on a gap down day
  • Upside reversal
  • Prior Uptrend and Volume Contraction within the base
Relative Strength CRSR Chart


Also take note of Relative Strength changes in character, these can make the start of a strong uptrend/downtrend.

For instance:

  • Earnings gap ups from Bases on large volume
  • Newfound respect for a key moving average

Avoid:

  • Gap downs on large volume
  • Breaking previously respected Key Moving Averages (KMAs)

Example of an RS Positive Change in Character-Power Earnings Gap Up

Relative Strength FSLY Chart

General Relative Strength Signs

These are indications that institutions are supporting a stock:

  • Red to Green moves
  • Green on Red days
  • High DCR + WCR compared to SPX
  • Closing well off lows
  • Tight price action compared to SPX
  • Rising RS Line
  • Pullbacks are on low volume

So Now How Should You Use RS?

  • Pick stocks with increasing RS Lines + other Signs of RS
  • On red days track what is showing RS
  • During corrections cut weak stocks first
  • During Bear Markets track RS signs- Future Leaders
TL Scripts Richard Moglen

Post by Richard Moglen

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