Relative Strength Analysis
highest price ($40) and divided it by its lowest price ($5) we see that Stock B
also experienced an eightfold increase between the same two price points. This
clearly shows that the RS line perfectly reflects all volatility, be it from one or
both of its underlying stocks.
Figure 24.3 shows Stock A outperforming Stock B. Because Stock B remained
unchanged, the RS line will mimic Stock A’s percentage moves perfectly.
Figure 24.4 shows both stocks rising. The RS line is rising, indicating that
Stock A is rising at a faster rate than Stock B. Even though both stocks rose by the
same dollar amount, that is, $20, the RS line is oblivious to absolute dollar moves.
It only tracks the percentage moves.
Figure 24.5 shows both stocks rising at the same percentage rate, rendering
the RS line flat. Here we see that even though both stocks rose in price, the RS line
can in such situations portray non‐activity. Hence practitioners must be careful
when interpreting RS charts. Flat RS lines do not necessarily imply that the under-
lying stocks are ranging or flatlining.
Figure 24.6 shows both stocks rising. Stock A is rising at a slower rate as com-
pared to Stock B, rendering a declining the RS line. Here we see that even thoughfigure 24.1 Outperformance and Underperformance Based on RS Line Action.figure 24.2 RS Line Absorbing and Reflecting Volatility from Underlying Stocks.