The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Relative Strength Analysis

both stocks may be rising, the RS line can in fact trend downward. That is why

we cannot refer to Stock A as weak, because it is not. Stock A had in fact risen

200 percent. But we can refer to Stock A as being weaker than Stock B. Stock A

has underperformed Stock B. Hence, when we use the term underperformance, it

is merely relative to the price movement of another stock and does not reflect the

real price movement of Stock A.

Directional implications of rS Line action

We shall now study the directional implications of the RS line. In the following

examples, we will be referring to an RS chart of Stock A prices being divided by

Stock B prices. There are three scenarios that we must consider.

Scenario 1: RS line is rising

A rising RS line can imply any of the five following possibilities:

1. Stock A is rising and Stock B is declining.


2. Stock A is rising and Stock B is flat.


3. Stock A is rising at a faster rate than Stock B.


4. Stock A is declining at a slower rate than Stock B.


5. Stock A is flat and Stock B declining.

In all five possibilities above, Stock A is outperforming Stock B.

Scenario 2: RS line is declining

A declining RS line can imply any of the five following possibilities:

1. Stock A is declining and Stock B is rising.


2. Stock A is declining and Stock B is flat.


3. Stock A is declining at a faster rate than Stock B.


4. Stock A is rising at a slower rate than Stock B.


5. Stock A is flat and Stock B rising.

In all five possibilities above, Stock A is underperforming Stock B.

figure 24.6 Stock A Rising at a Slower Rate than Stock B.