Relative Strength (RS) Lists
At TL as you know we maintain 3 WLs. The Gappers, High Tight Flag (HTF), and IPO WatchLists (WLs) are covered in our Key Watchlists post. In this post, we will go over what RS Lists and Standouts Lists are and how they fit into the process of trading the general markets. Both the RS & Standout lists are derived from our 3 main watchlists. RS Lists are noted when the general market is breaking below pivots on our daily plan, losing key moving averages intraday or making new fresh lows as drawdowns steepen intraday.
Relative Strength (RS) List
The RS Lists are useful in many ways:
They show groups that are acting well on a relative basis and determine Potential Leadership Groups (PLGs) especially when the markets go into a corrective state.
When writing out RS Lists when markets are breaking below pivots on our daily plan, losing key moving averages intraday or making new fresh lows as drawdowns steepen intraday, you will notice select groups that exhibit Relative Strength (RS) as a whole and multiple stocks within those groups that act well. For example (as of writing this in 2020) – if the Application Software Group is acting well you may see names like TWLO CRWD DDOG ZS and others show relative strength. When multiple tickers within the same industry group show RS – this is considered Group RS.
As markets retrace lower and group RS exists – those groups become Potential Leadership Groups if and when the market resumes its uptrend. Knowing your Potential Leadership Groups is important as your portfolio should be reflective of what held up well on a relative basis while the market was under pressure.
Stocks that show up repeatedly on the RS Lists become candidates for Top 10 Report + Swing Trade Plans in the future.
In addition to PLGs, RS lists tell us which individual stocks are acting well and show up repeatedly while the markets go under pressure. These stocks that show up repeatedly are of interest if and when they shape on the daily charts, present proper risk to reward ratios, and when the market resumes its uptrend. Having a strong list of stocks at all times while the markets see pressure is important, as these are the stocks that will outperform the general markets when an uptrend resumes. See Relative Strength post.
RS List show if the underlying market is weak or strong as S&P trades below respective pivots.
The third use of the RS Lists is when the market is declining or under pressure – it tells us how leadership as a whole is acting. If leadership is continuing to outperform the general markets this should tell us that the underlying market is healthy and there’s a probability that the general market uptrend will eventually resume. If the RS Lists are sparse on a distribution day – this would tell us that institutional are stepping up to sell stock -even the high-quality ones that we tend to track at TL. When RS Lists are sparse that is a warning sign and that is when traders must be cautious to not go against the general market trend.
When the markets are in an uptrend and we have a rally day in the markets, at TL we list out stocks that are outperforming the general markets. This list will help you when the markets eventually go under pressure – and one should watch for the names on the standout lists to show up on the RS list.
Doing this over and over again and on days where the market rallies or sees pressure will keep you in tune with how leadership is acting and most importantly how the general markets are likely to behave based on how leadership is behaving.
Being in tune with the market is a key component to driving successful returns in the markets and maintaining these lists on days where turbulence or a rally is observed will keep you on the right side of the markets more often than not.