I have a process I go through each night when looking through my scans and doing my homework. Relative Strength is a big part of that process; but before I go through the lists I often take a moment to think through where we are in the broad markets and what types of scenarios I feel might materialize next. Tonight, I come in still leaning slightly higher after the markets have been churning for a few days, but also recongize we have had a great move and should be ready in case an actual pullback starts to materialize. So how does this effect how I look at my scans?
If the markets suggest a long bias knowing where we are in the move, I would be more likely to use the lower ranking names on the GT500 RS Gainers for rotation opportunities. I would also be concentrating on the GT500 RS Losers list for pullback plays. a few days of congestion can often create good longs opportunities from the losers list.
Now if we start to rollover and pullback more suggesting a short bias, then the GT500 RS Gainers list will be great for fade plays from “outsized” moves. The GT500 RS losers list will be scoured for breakdown candidates that never joined the rally.
So relative strength gives you an idea of how the stock has performed versus the rest of the universe over the last 3 months. Following it can be a valuable part of your toolbox, but don’t make the mistake of thinking these tool can only be used one way. If you do, you will miss out on a ton of great opportunities.
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)