THE HAnDbook of TECHnICAl AnAlysIsline and a forward‐shifted moving average as a means of generating trend signals,
with the added advantage of reduced whipsaws. Unfortunately, such crossovers sig-
nals suffer relatively more lag as compared to non‐displaced moving average signals.
Specific terms for Describing relative
Strength performance
When describing performance between two data series, whether securities, indi-
ces, interest rates, or commodities, we always use the following terms:
■ (^) Outperforming/strengthening against/stronger than
■ (^) Underperforming/weakening against/weaker than
We cannot use absolute terms like strong or weak. This is because we are only
measuring the ratio or spread and not the actual or absolute prices of a security
or index. As such:
■ (^) Underperformance does not mean that the security is necessarily falling in price,
as prices could still be rising, just not as fast as the market or another security.
■ (^) Outperformance does not mean that the security is necessarily rising in price,
as prices could still be falling, just not as fast as the market or another security.
Assume that we created an RS line using the ratio method, that is, by dividing
Stock A’s prices by Stock B’s prices for each period. When the RS line is rising, we
say that Stock A is outperforming Stock B. Alternatively, we could also say that
Stock B is underperforming Stock A. Both expressions have the same meaning
with respect to an uptrending RS line.
When the RS line is declining, we say that Stock A is underperforming Stock B.
We could also say that Stock B is outperforming Stock A. Again, both expressions
have the same meaning with respect to a downtrending RS line.
Assume that we created an RS line by dividing Stock A’s prices with that of a
broad market index (like the S&P 500, for example). Figure 24.1 illustrates how
the terms outperforming and underperforming are used in such a case.
the Construction of rS Lines
In this section we are going to study the construction and behavioral characteris-
tics of RS lines. In the following charts, the ratio method was used, dividing Stock
A’s closing price by Stock B’s closing price to form an RS line. The RS line there-
fore represents a ratio line. It tracks the percentage moves between Stock A and
Stock B, and not the absolute dollar moves.
In Figure 24.2, we observe that Stock A was flat whereas Stock B was
displaying extreme volatility. Stock A remained unchanged. Upon closer ex-
amination, we see that the RS line has absorbed all of Stock B’s volatility, and
is now perfectly reflecting Stock B’s volatility. If we took the highest RS value
(2) and divide it by the lowest RS value (0.25), we see that the RS line experi-
enced an eightfold increase between two price points. If we also took Stock B’s