Using Relative Strength Analysis

Relative Strength Line is NOW available in SI Station – Golden Swing screener

What is Relative Strength Line (RS Line)?

RS Line compares a security’s price action to that of the benchmark index. A rising line indicates that the security is outperforming the benchmark index and vice versa.

RS Line will still rise if the security is falling less than the benchmark index. RS Line can be plotted on any timeframe.

The RS Line should not be confused with RS ranking in Golden Swing which is a metric that measures a stock’s price performance over the past 4 weeks weighed to the most recent weeks.

How to use?

a. Early signal before Price Breakout
RS Line making new high as a stock breaks out serves as a validation of the price move. At times, RS Line makes new high prior to price breakout. This provides traders with early signal of the impending move

After rallying to a high of 1.75, stock did classic retest of the downward trendline (Y-Y). It was followed quickly by a bound with RS Line rising sharply making new high (1). This is a sign of strength. Stock eventually broke out 4 days later.

b. Topping out signal
Similarly, when stock is making new highs but with no similar signal from SR Line is an indication of weakness. Traders can take necessary precautionary measures and prepare to bail out on further price confirmation.

After rallying to a high at “A”, stock showed sign of weakness as evidenced by the sharp decline in RS Line (1). It was proven right with the subsequent rally (B) on lower volume, forming a potential Double Top. Stock eventually broke the neckline. After a brief bound, stock moved down sharply.

c. Early signal emerging from a sell-down
Strong stocks tend to hold up well during a broad market sell-down. When market finally recovers, strong stocks often charge ahead. This is very much like a beach ball being pressed under water. With the removal of the pressure, the ball pops right back up.

A good example is Keppel Corp which has been rising steadily since Jan 2022. During the severe market sell-down in Mar 2022 (1), Keppel was trading sideways showing its relative strength. RS Line was steadily rising and making new highs (2).

When STI finally recovered (3), Keppel Corp raced ahead with strong rally (4).

Final Note

RS Line is not to be used in its isolation. It should be used in combination with RS ranking and the technical action of the stock itself. When the context is right, RS Line proves to be a useful tool in giving the traders the added advantage.

Happy Trading!