Relative Strength: Buy the Dip or Fade the Rally?

Dan RussoCMT, Chaikin Analytics

Dan Russo, CMT• 19 Years on Wall Street

• Chartered Market Technician

• MBA From Fordham University

• Co-Chair of the NY Chapter of the CMT Association

• 10 Years Covering Large Institutional Investors

• Teach Technical Analysis at Baruch College in NYC

Topics of Conversation

What is Relative Strength?

How Do We Measure Relative Strength?

Relative Strength and Asset Allocation

Relative Strength and Stock Selection

What is Relative Strength?

Relative Strength compares the performance of one security to another with a ratio chart. This indicator is also known as the Relative Strength indicator or Relative Strength Comparative. Often, the Price Relative indicator is used to compare the performance of a stock against a benchmark index, such as the S&P 500. Chartists can also use the Price Relative to compare the performance of a stock to its sector or industry group. This makes it possible to determine if a stock is leading or lagging its peers. The Price Relative indicator can also be used to find stocks that are holding up better during a broad market decline or showing weakness during a broad market advance.

Relative Strength is simply the base security divided by the comparative security. Typically, the underlying security is a stock and the benchmark is the S&P 500.

How Do We Measure Relative Strength

I have three ways that I like to measure relative strength depending on what I am

analysing:

1. In a Table - More Quantitative

2. In a Chart: Both as a Ratio and an Oscillator. The Ratio Chart Allows for the

Application of Traditional Technical Analysis

3. In a Relative Rotation Graph

Each of these tells the same story in a slightly different way

In a Table - For Quantitative Studies

Data From Optuma

Ratio Charts

Chart Source: Optuma

Ratio ChartsiShares

Chart Source: Optuma

Relative Strength as an OscillatoriShares

Chart Source: Optuma

Relative Rotation Graph (RRG)iShares

Chart Source: Optuma

Relative Strength for Asset Allocation

Data From Optuma

Relative Strength for Asset AllocationiShares

Chart Source: Optuma

Relative Strength for Asset AllocationiShares

Chart Source: Optuma

Stocks Are Leading, Now What? Sector Work

Data From Optuma

Analysis of the Technology Sector

Chart Source: Optuma

Analysis of the Energy Sector

Data From OptumaChart Source: Optuma

LT Debt to Equity Ratio

✔ Price to Book Value✔ Return on Equity✔ Price to Sales✔ Free Cash Flow

✔ Price Trend✔ Price Trend Rate of Change✔ Chaikin Money Flow✔ Relative Strength vs. Market✔ Volume Trend

✔ Earnings Estimate Trend✔ Short Interest✔ Insider Activity✔ Analyst Ratings✔ Industry Relative Strength

Earnings Experts

Stock Selection: Fundamentals and TechnicalsLook For Leading Stocks in Leading Sectors

20-Factor Model

Buy the Dip: Cadence Design - CDNS

Data From Optuma

Chart Source: Chaikin Analytics

Buy the Dip: Cadence Design - CDNS

Data From OptumaChart Source: Optuma

Fade the Rally: Halliburton Co - HAL

Data From Optuma

Chart Source: Chaikin Analytics

Fade the Rally: Halliburton Co - HAL

Data From OptumaChart Source: Optuma

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