Relative Strength Analysis
carried out. This process is repeated once the selected stocks exhibit deterioration
in performance. Market participants then rotate out of the previous portfolio into
a new set of better‐performing stocks.24.2 Chapter Summary
Relative strength analysis affords the practitioner an added dimension to under-
standing how markets relate to and interact with each other. It provides a way
of identifying weaker markets and forecasting potential trend changes based on
intermarket behavior. It is also a vital tool and indispensible aid in the active
process of managing the rotation of best performing stocks within a sector or
industry.Chapter 24 Review Questions
- Explain the meaning of relative strength.
- List the number of ways one can study the relationship between two markets.
- What is the difference between the ratio and difference methods of construct-
ing RS charts? - What are the advantages of using RS charts?
- Explain how two stocks can rally but have their RS line decline.
- What technical tools would you employ to help identify RS trends?
- How are performance charts better than RS charts?
- Why would you need price confirmation when trading via the use of an RS
line?
referenCeS
Kirkpatrick, Charles, and Julie Dahlquist. 2007. Technical Analysis: The Complete Re-
source for Financial Market Technicians. Upper Saddle River, NJ: Pearson Education.
Murphy, John. 1999. Technical Analysis of the Financial Markets. New York: New York
Institute of Finance (NYIF).
Pring, Martin J. 2002. Technical Analysis Explained: The Successful Investor’s Guide to
Spotting Investment Trends and Turning Points. 4th ed. New York: McGraw‐Hill.