Understanding and Trading Relative Strength | Getting Started with Technical Analysis

[Music] [Music] hello and welcome everyone my name is cameron may it's 11 o'clock eastern standard time on a monday morning that means that it's time for our ongoing weekly series of discussions called getting started with technical analysis and today i think we're going to be tackling a question that a lot of us have had in our portfolios or about our portfolios at one point or another you know have you ever looked at your portfolio and thought hey my stocks are going up this is great except they're not going up as fast as everybody else's and we get this this fomo fear of missing out well today we're going to be talking about an indicator that might help us to identify which stocks are kind of lagging others and which seem to be taking more of a lead maybe when there's a transition from one of those scenarios to another so we're gonna be talking about an indicator known as relative strength i'll set a more precise agenda in just a moment of course but before i can do that let me say hello to everybody that's already chatting in let's see who's here already we have vijay and john diosa red solo cup michael uh wayne v j j todd mike eva alfred larry charles frederick hassan frank wayne sarah krishna ernesto dillon mf is that ilker jack osborne tony george texas umass alum ona shane fred the list goes on ganesh uh joni great to see everybody thanks for joining me week after week those of you who are here each week to to learn and to contribute it's always your attendance and your contributions are always appreciated there were definitely a few of those names in that list that i didn't recognize today so if you're a first timer in my webcast uh i want to welcome you as well if you'd like to chat in let me know this your first time in one of my webcasts i always like to see who my new audience members are and if you're uh if you're watching on the youtube archive after the fact enjoy the presentation but be aware that you're invited to join us live monday mornings 11 o'clock eastern standard times when we kick things off in this webcast typically runs about 30 minutes and the final final note i want to make i'm very happy to do it ben watson is joining us in the chats his role is just to help answer any questions of yours that i can't get to during the during the presentation ben is a fantastic resource to have here so take advantage of that opportunity while it's there everyone alright so let's get in let's set a more precise agenda but the very first thing that we're going to do is issue an invitation to follow me on twitter if you're not following me on twitter at cma underscore tda you can see it right there on your screen that's my twitter handle you can also follow ben um his handle is at b watson w-a-t-s-o-n underscore tva and uh before we can talk about anything else boy we need to discuss risk risk is real this is important information please bear this in mind the content that we're about to provide is intended for educational or informational purposes only options are not suitable for all investors as special risks inherent options trading may expose investors to potentially rapid substantial losses uh any investment decision you make in your self-directed account is solely your responsibility transaction costs are important factors and should be considered when evaluating any trade while this webcast discusses technical analysis other approaches including fundamental analysis may certainly different views and finally all investing inc involves risks including the risk of loss all right so here's our agenda for the day as i mentioned we're going to be talking about this indicator known as relative strength with over 100 people watching the live webcast already and i would suspect we're going to push up to 150 maybe 200 as we get a little bit deeper into the discussion i'd like to know how many of you have have either used relative strength in your paper money or real money analysis it doesn't matter which or you're at least familiar with this this is actually one of the the more commonly uh used or one of the more popular indicators at least that's been my experience in the in the 20 years or so that i've been doing this now a little bit more than that now actually it's been a lot more than that now in any case i do like to know uh what what are your thoughts and uh well let's get into how this thing is is constructed and used whether you've used it before or not so we're going to cover the construction of the relative strength we're going to discuss how a chart user might use relative strength in their planning for stock trades and we're going to go through some example charts to get some repetition all right so yeah getting a lot of comments there yeah wayne used jack says yup ganashan chain and edward and mike and umass alum familiar not currently using that's okay as always this is an educational discussion it's not a sales pitch so obviously not every investor is going to is going to use every indicator we just try to give you a rounded understanding of all the tools that are available there on your thinkorswim charts and then you can decide for yourself what seems to have application for your portfolio if anything all right so let's go right to the charts and i'm going to start with johnson johnson and i think johnson johnson tells the story the story that i was just discussing in theory just imagine you don't have to tell me i don't want to know if you actually own johnson johnson or not but just imagine that you were that you were an owner of johnson johnson 12 months ago and over the course of the year here's what that ownership has produced hey that looks pretty good right however even though there's been a general upslope to johnson johnson's prize performance it's actually been lagging in the performance of maybe an average component company of the s p 500 that's actually difficult to spot when you're looking at an individual chart um but let's let's now introduce that indicator that might give us some insights into into whether a company is underperforming or potentially outperforming quote unquote average and we're going to set that average a benchmark as the s p 500 is not the only benchmark that we might establish but it's going to serve for today's purposes all right so i'm going to come up here let's click on the little the little beaker icon i believe i believe uh john mcnichol was chastised by a chemist recently saying this is not a beaker it's a flask all right i'm going to click on that flask slash beaker icon and i'm going to go to the menu and we're going to type in the words relative strength now there is a there is a very similar sounding indicator that's also commonly seen on self-directed investors charts it's known as rsi which is relative strength index that's actually not the one that we're going to be talking about today and it is this is actually substantially different from the rsi so we're going to be using the just plain old relative strength so you see that right there in our menu i'm going to highlight relative strength we're going to add that to our chart and i'm going to click apply as i do that i do want to make a quick note notice here by default this indicator is borrowing from us leaning on the s p 500 i'm going to leave that at that default at least for a while for today all right so let's click apply and we click ok and what we now notice is we have this lower technical studies below our price chart so we call it a lower study and it consists of a couple of lines one of which is prominently going the opposite direction of johnson and johnson all right so i want to talk about both of these lines we have a red line and we have a blue line and what we're doing by adding this indicator to our chart is we're comparing the what we call the relative strength of johnson and johnson in contrast with the s p 500 we want to know is johnson has johnson johnson over the last 12 months been relatively stronger or weaker than the s p so how is that accomplished how is this accomplished well um it's this is actually some some indicator indicators are kind of uh complicated this one at least in at least in my perspective is really simple in its construction all we do is each day we take the performance of whatever whatever stock or whatever chart we have up here on the price chart and we um construct a ratio of that performance against whatever whatever we have in our lower study which is our for right now the s p 500 so we take the percentage gain or loss on johnson johnson and divide it by the percentage gain or loss of the s p so for example let's say johnson and johnson had a pretty good day and it went up one percent but on that same day the s p went up two percent for that day which which of those two was stronger well the s p was what that results in on our relative strength indicator is a bit of a dip in that indicator if we were to reverse that scenario and we have a larger gain on johnson johnson versus the s p we'll see a rise in this indicator so sometimes this can produce kind of surprising results because an investor just looking at the price chart of johnson johnson might be saying hey this is strong this is doing well however if we were to look at the relative strength look at what's been happening on a day by day basis when we draw a line to connect all those day-to-day performances we actually see the s pardon me johnson johnson has been lagging behind the s p's performance resulting in this downward slope to our relative strength line that line is the relative performance of of the of johnson johnson versus the s p so now you might ask well what's this what's this red point this red line well that red line is actually our benchmark overall so you'll notice when you know no matter what time frame we're on on a chart the blue line in the red line the red line will always start at the same point the red line then becomes the benchmark this is how the s p has performed it gives us a quick point of reference and then the blue line is just how the how our charted stock or whatever our chart is up here how that has performed against the s p so if that blue line is falling and it's going below red we can just quickly see okay so our charted security has been underperforming the s p we can see its trend of that performance and we can see how far it has lagged the s p since we started that's what this red line means so when i look down here and i see oh our blue line is way down here not only does it tell us that it's been underperforming for most of the year but i can also quickly see this is the total net difference between the s p's performance for these last 12 months and johnson and johnson's performance for the last 12 months so there we go so there are two lines and i think right away you can start to envision how this might have some application for an investor if we're looking for stocks that have been primarily stronger than the s p what do we want to see with this blue line both in its in its direction and its position to the red line well an investor might want to see the blue line trending higher confirming not only is the stock you know well actually a pause right there i was about to say something's not accurate but anyway now we want to see that an investor might want to see that blue line trending higher meaning the the security in question has been outperforming the s p and we can see net how it's done since we started our chart so we can change our time frame to six months we can see how much we've outperformed for six months we can change it to a year or five years or whatever all right so um okay and eva's saying oh there's a minor divergence okay yes very good now we're starting to get into other potential applications all right so i think the first application is well we might just bring up a chart and look at that general direction and are we above or below the red line now there are some additional refinements that might be applied to this indicator and i want to get to eva's comment i want to get to jack's comment there i'm going to switch our chart here actually you know i wanted to show one other example just to show you that this certainly happens from time to time here's visa for the last 12 months looking pretty good as a matter of fact it's had a really nice week recently but overall if you look at where we started our race our two horse race of the s p versus visa you can see overall visa has struggled in it's significantly below the 12 month month performance of the s p now i want to bring up some other charts and look at these look at this indicator through maybe a little bit of a different lens let's have a look at facebook okay here's facebook and if you look at the stock you know it was kind of waffling around for about five or six months and then it started to get ahead of us ahead of steam and it's kind of taken off so in this case let's look at our relative strength and i don't think to anyone's real surprise given what the s p has done over the last 12 months while facebook was going sideways if we've been following the s p we know the s p actually had a pretty good run during that period so during that time we might already be envisioning that the relative strength of facebook was lagging behind the s p we can see that here with our blue line heading down so facebook got off to a little bit of a nice start first month and a half and then it started to sag and what some technical traders will do in these circumstances when they see this blue line heading downward that might be causing them to maybe pump the brakes hit the pause button on anything any unlike let's say a new bullish position on that stock however they might also be keenly interested in when are conditions changing all right so here we're going to apply some very basic technical analysis just trend and support and resistance so i'm going to draw some i'm going to draw a line connecting some of these highs on the relative strength line and this is really just reflecting that the strength has been weak compared to the s p however what do we notice right here maybe that second week of march let me highlight that with an oval right here you can see that that the relative strength actually started to push up through its established downward sloping trend line so this is going to sound a little bit goofy but the relative strength seems like maybe it's getting a little bit relatively stronger if we look at the same time on the chart though is there anything terribly encouraging from a technical perspective there looks like boy we're still getting lower highs here maybe equal lows not a lot of not a lot of terrific strength showing up on the chart but price generally still softening but we're breaking that downward sloping trend line for some technical traders that's a significant development there may be a tipping of the scales in the other direction a changing of momentum at least as identified by relative strength this may be indicating that price is likely to start to accelerate ahead of the s p and interestingly from that point in this case worked out pretty well for facebook and you can see that the stock started to head higher from there and started to make higher highs and higher lows well that was some time ago that was in the that was in the third or the second week of march now what a technician might do from here when we've established an upward trend rather than connecting the highs and identifying downward sloping resistance as a potential signal for a swing to bullishness we might connect the lows and i didn't intend to draw another oval here let's get rid of that oval and i'm going to draw a trend line there we go i'm going to connect those lows maybe carry that trendline right up through here that looks like a pretty fair representation of that of that upward trend that we've been seeing so we're making higher lows through all this period establishing that trend line and then just very recently when did this when did this happen right there maybe moving from the the second week of september into the third week of september 15th to the 16th that may be signaling a shift of momentum again for facebook where it's now beginning to lag the s p and we know the s p didn't have the best last couple of weeks but facebook had it even worse so that looks like that was happening right around this area so let's make sure i got that aligned pretty well and i think that i did so as of that point you might notice that our trend line on our stock generally going up we're generally still making higher highs and higher lows however a difference in behavior in our in our relative strength and eva and others might describe this as a divergence of behaviors all right but generally speaking um that's how that's that's one way that a trader might start to use relative strength to identify reversal points potential reversal points on price using using this comparative analysis all right so let's look at that let's get some repetition with uh with that application of this indicator how about we look at tesla see if you can start to adjust your eyes to this sort of a process you can see with tesla let's just do it for the whole year we had a little this one was more sideways than anything but originally okay the first couple of months of the last 12 tesla was kind of keeping pace with the s p 500 you can see that here and i'm just going to draw a line connecting and again i'm on my ovals let's remove that oval let's switch over to our trend line tool again there we go but a bullish trader who sees this sort of sideways behavior where okay we're keeping pace with the s p but they're looking for something that's outperforming they may connect highs available highs to see if we can signal when there's been a shift in that momentum when when our stock is now starting to outpace the s p that looks like that happened around uh november 17th so just about here and you can see subsequently tesla went for a nice run which can be exciting for bulls however the anticipation is it won't necessarily last forever so let's draw our trend line across those lows here tesla's still pressing higher but our trend line is broken right right through maybe the the first week of february that looks like that's happening right about here so something significant may be happening happening regarding a shifting of relative strength with tesla then we start into our downward trend you can see we're making lower highs and lower lows there's a bit of an exaggerated one here but we come back up and we start to fall back in line with that established downward slope so let's draw in maybe a trend line here and this is kind of interesting this is getting fairly short term this is uh this is going to be an application of this indicator that might make some some traders who maybe prefer a little bit longer outlook a little bit squeamish they might prefer to draw their trend line let's say across these highs all right that's one way that could be done but i'm gonna let's let's erase this one i'm gonna look a little bit closer at this one we're gonna scrutinize this chart a little bit more closely trendline is broken right here very late march and you can see price starts to rise from there we might establish or begin to establish a trend line right through here where we get maybe three touch points there's one there's a second there's a third and then that's violated before not very long so really we only got maybe out here to uh that third week of eight that was the fourth week of april and prices start to soften again so i think you're getting that repetition let's draw down across these highs and see when we maybe get a signal of reversal again and that looks like it comes in about right here prices rise again and really since then i don't think that we've seen a significant break of those lows there we go off we go so as of this moment relative strength seems to be confirming tesla the outperformance of tesla versus the s p 500 and you can see another way that we can gauge that is just looking at that blue line and is it is it gaining in strength relative to the red line rick says if you do more vertical spreads his relative strength not as important so rick that's an interesting question i think that an argument might be made even though this isn't really a discussion of options necessarily um there are going to be some traders who might use this to confirm their vertical spreads yeah you know they might let's say if they're looking to put on a bull put spread look for a break of resistance for example on their relative strength because what they're trying to do is gather evidence that seems to that seem to indicate bullishness wherever possible then if we uh get a break of that trend maybe that's a signal to do let's say a a bear call spread or maybe legging into an iron condor lots of different ways that that might be used uh jaylax says do you ever use angles to determine the break all right you know jaylac i don't know exactly what you're implying there i think i i kind of guess i kind of think i get a feeling for what you might be talking about if it's kind of a shallower angle maybe it's not a severe break for example if we get a steeper angle maybe that signals a more significant short-term reversal possibly i haven't ever done that in that way but i could see an argument for that all right is this useful getting this sort of repetition let's do it let's do it for one more stock how about adobe adb-e so here's adobe let's see if we can adjust our eyes to this uh to this process right so adobe you know holding steady maybe a shareholder is a little bit bored with the performance over this term over this time frame uh if they're looking for strong bullish performance or strong bearish moves but mostly range bound during that time the s p was having a pretty good run so that we we can we're not going to be really surprised by a downward slope to the relative strength however as a as a set up scenario for new bullishness that might present this opportunity to bring in this sort of a trend line let's draw our trend line right down across there is that close enough i think that looks fair notice this doesn't exactly catch the lows it's not designed to do that in this case we got our signal as we're transitioning into august which is right about here right didn't didn't catch the lows precisely however this is a signal that that the that adobe seems to be outperforming the s p it's growing in its relative strength and from that point yeah we crept a little bit lower over the next four or five weeks so we got a nice run up bit of a pullback that got us just really below by a day or two our starting point our breakout point but overall if we're looking at where we got that signal to where we are today that turned out to be a pretty valuable signal however we decided to go with that could be a stock position could be a new bullish options trade however we want to structure that but what's going on right now with relative strength on adobe we rose up here and then kind of settled into a pattern and what we might do from here is an investor might actually just connect the lows across that time frame because we kind of settled into a nice little range there higher highs and higher lows on a shorter term basis is stretched out into about a period of a total period of about three months and then we've broken that so boy again maybe another significant shift in momentum but hopefully what you're seeing here is the potential for application when planning all sorts of traits if we're planning for a bullish trade maybe that trader waits for a break of the downward sloping resistance line a bearish trade or exiting a bullish trade may be a a breakdown of the upward sloping trendline krishna says is this a day chart yes this is this each of these charts has been on a 12-month daily chart so each candle is representing one day of uh trading activity but is this an indicator that is portable from one time from time time frame to another yeah most indicators actually are so are there traders that maybe use relative strength but on an hour by hour chart almost certainly are there traders using this same analysis but on maybe a week by week chart again almost certainly i can't ever speak for an individual trader and how they approach the management of their portfolio but this is just like most technical indicators portable for them from the one time frame to the next at least conceptually all right everybody we've accomplished what we set out to do today i definitely appreciate your attendance and your contributions to the discussion ben thanks for being here to help with any questions uh but here was our agenda for the day we wanted to go through the construction of the relative strength indicator we wanted to go through potential uses identifying just you know confirmation of trend divergence from trend and uh what are those breaks of trend lines and how might they assist with making those trading decisions and we went through a series of example charts to really hammer home the the education just make sure that lesson sort of sticks now again it's not a sales pitch for this indicator what i would suggest though is maybe go to your paper money account and explore it see if it has application for your portfolio if not put it back in the toolbox use the ones that that produced that uh appeal to you aries says do you use vwop actually we did just do a discussion on exactly that topic just maybe three weeks ago so if you go to youtube after today's webcast you can just type in cameron may uh volume weighted average price or cameron may v w a p and you'll find a video on that on youtube all right everybody thanks for giving your time today definitely my honor and my privilege to be here to talk with you each monday i hope you'll join me again next monday we'll find some new element of technical analysis to explore in good detail in the meantime i have regularly scheduled sessions on tuesday on wednesday and on thursday so you're invited to join me then but as i let you go just remember that risks are real we did use real examples in today's discussion it's not a recommendation or endorsement of those securities or those strategies and hey whenever i see you again until that moment arrives i want to wish you the very best of luck happy investing bye [Music] you

2021-09-29 13:52

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