THE HAnDbook of TECHnICAl AnAlysIsfigure 24.7 Which Is the Weakest Currency?
Scenario 3: RS line is flatlining
A flat RS line can imply any of the three following possibilities:
- Stock A is flat and Stock B is flat.
- Stock A and Stock B are both declining at equal rates.
- Stock A and Stock B are both rising at equal rates.
In all three possibilities above, Stock A matches Stock B’s performance.Let us now look at an example from the foreign exchange (FOREX) market.
Refer to Figure 24.7. Can you work out which currency is the most underper-
forming or weakest among the five currencies displayed?
Since the Euro is weaker than the JPY, GBP, and CHF, this makes the USD the
weakest of the entire group, as the Euro is still stronger than the USD.
bullish and bearish Divergence
In an earlier section we observed that outperformance and underperformance
do not necessarily imply bullishness or bearishness in the stock. There are five
possibilities associated rising or falling RS lines. It is only by referencing the actual
stock chart that we are able to determine whether outperformance and underper-
formance imply that a stock is bullish or bearish. It is important to note that when
practitioners refer to a rising RS line as “bullish,” this term is used in its relative
sense. The actual stock may in fact be declining at a slower rate with respect to
the market, but it is still “bullish” relative to market performance. It is only when
the actual chart of the stock is available for comparison that a practitioner can
use the terms bullish or bearish in their absolute sense. In the following illustra-
tions, the terms bullish and bearish are used in their absolute sense since the chart
of the stock is available for comparison against its RS line.
Figure 24.8 depicts bearish divergence between the RS line and price. It shows
that although the stock is making higher peaks, it is underperforming the market