Linda Raschke presents: Traditional and Uni ue Wa s to use Relative Strength MTA – November 10 2011 Copyright © 2011 Linda Raschke and LBRGroup,Inc. All rights reserved.
Relative Strength
History History – Respected Respected technic technicians, ians, market market practitione practitioners rs and academics cite relative strength strength for the past 90 years. Theory – “The strongest strongest groups groups get stronge stronger”. r”. Practice Practice – Traditional Traditional RS investment investment models to short term day trading applications. Filters Filters – market market enviro environme nment nt and volume, volume,
Relative Strength
Relative Strength is one of the most powerful tools for making money in markets. The theory is that the stronger a mar e s, e grea er e supp y eman m a ance, and the greater likelihood it will continue to outperform other markets. e a ve reng s ou never e cons ere a pr mary timing tool, but works best when used in a consistent framework using other market indicators. , environments but does not work well in other market conditions.
Relative Strength –History
Robert Rhea (1933) wrote about relative strength in Barrons. He compared the percentage swings on an individual stock to the % moves on the Dow Jones. Gartley (1930’s) looked at stock groups using relative strength. He was among the first to quantify RS. His work laid the foundation for the concept of “beta”, defined by William Sharpe. ’ “ ” . strength is measured by those issues that give up the least ground on the reactions down. George Chestnutt (1960’s) American Investor’s fund outperformed the . “ performing industries.” He used punch cards and an IBM computer to follow a disciplined strategy. Edwin Coppock (1960’s) Did studies on relative strength and published in arron s. e at ve strengt s espec a y use u or nterme ate an ong term trading.
Relative Strength -History
Robert Levy (1967) pioneered academic studies on RS. Over his test eriod in the 1960s he concluded that 6 months was the o timal window by which to measure RS and this was used to predict the subsequent 6 month period. am ’ e ’s - “se ec rom ea ers w months. Hold for next 6 and 12 months .” ’ “ Relative Strength among the upcoming quants.
a oo
ac o
”
When does Relative Strength work best and when should it not be used?
RS works best in up-trending markets, in heavy volume markets, and thrusts off cyclical lows. It works well in ot stoc s, sectors, an commo t es. It falls apart in strong downtrends, or right after a market has had an initial downside break. It also will under perform in a light volume trading range. Lastly, if the market has already had an extended markup, rotation w en o a e p ace.
Practical Applications
Traditional investment models and look back periods. A 6month look back tends to work best, and a 4 week look . Measuring off cycle lows: Use of 2,3,or 5 period Rate of ange o e erm ne e n a momen um rus . a ern recognition works well with swings, too. Trading in stocks and futures: Ranking the first 30 minute range, looking for the “Open-Drive” principle. Day trading in stocks or stock indexes: confirmation/nonconfirmation and leadership Trading in commodities
Comparison of 4 indexes by visual inspection. Confirmation/non Confirmation/non-.
Detecting changes in leadership: pattern recognition vs. . .
Buy the RS leaders off Cycle lows. In this case, Relative Strength is determined by comparative structure of the swings.
Comparison of two stocks in the same industry group: KO .
PEP divided by S&P 500 with 180180 -period moving average
You can measure RS to see if it is rising or falling, increasing or decreasing in momentum.
To obtain a relative strength line, divide the price of the stock by the price of a market index (or another stock if comparing the two).
Price rising and RS rising is most bullish.
Price falling and RS falling indicates the weakest scenario.
strength line to highlight trend, confirmation and nonconfirmation, and even momentum.
MCD divided by S&P 500 with 180180 -period moving average
DE divided by S&P 500 with 180180 -period moving average
Currently, oils shares are turning into the RS leaders again.
Which of these two stocks gave the best initial thrust off a cycle low in the indexes? (2(2-period ur u ru
Rank the position of a 33-period RSI at a cycle low or 3 3--5 days after the low. AA has one of the lower rankings no matter .
Compare AA to WMT, which gives a higher RSI reading regardless if you measure it at a cycle low or shortly thereafter. Which performed best over the following week?
Day-trading stocks:
Take (close – open)/(high – low) of the first thirty minute bar and sort for the highest and lowest readings. If you do no ave a sor ng rou ne suc as ra ar scan o ere y TradeStation, simple visual inspection works quite well. You are looking for that “open-drive” concept where prices minutes. ,
or use the reactions in the S&Ps to time entry as well.
Do not use t is strategy on ig t vo ume tra ing ays. There will not be enough follow-through after the initial morning thrust.
First 3030-minute bar can set tone for the day. Here are 4 stocks on the same day, which was a trend day down.
NYSE Volume – 30 minute bars: Look for higher volume inthe first 30 minutes when using relative strength to day trade.
Futures: First 3030-minute bar off 7 AM readingreading- similar relative strength reading approach to day trading stocks.
Same trading day with lines drawn at the 7 AM reading instead. Easy to see a grid of 20 markets this way!
Which markets will be weakest/strongest into the close?
The top 4 were the weakest one’s and close on their lows. Crude and EC hold up best (the red line marks the 7AM CST reading)
Which of the 6 markets will perform best on the next upswing?
EC and Gold had the largest swings down, and thus the next .
Both the Swiss and the Yen were considered to be “safe havens” during periods of Arab turmoil and European debt crisis, but which market turned out to be the home run?
