Relative Strength Part 2

The other type of Relative Strength is a strength relative to the stock or index itself. As a metaphor lets use a weight lifter. A weight lifter can be compared in his/her strength to the strength of all the other weight lifters as well as his/her own performance. On a good day you may be able to lift more than on some other day. So too with stocks relative to their own price performance.

The Relative Strength Index (RSI) is just such a measure and it calculates a ratio of the recent upward price movements to the absolute price movement of the stock being measured. The RSI ranges from 0 to 100. It can be put on any time frame from minute to daily to monthly and indeed will have different values based on these different time frames.

The Relative Strength Index (RSI) was developed by J. Welles Wilder and was first introduced in 1978. It is commonly used to measure if a stock is overbought or oversold and in market timing. There are many good resources on the Internet for further information about the RSI indicator. What is of note is that it is a value that can be placed inside of a spreadsheet and sorted according to its numerical value, i.e., from lower to higher or vice-versa. This type of sorting and using different time frames together with the Relative Strength comparative mentioned in the prior post is an excellent way to find stocks headed higher in price.

As an example I am including a 6 month weekly chart of Agilent Tech Inc (the first stock in the $SPX, alphabetically speaking) ticker symbol “A” and the $SPX index on a weekly chart to show buy and sell signals. I am using the RSI(3) technical indicator and strength is indicated as a value above 50% (buy signal) and weakness as a value below 50% (sell signal). These values can be published numerically in a spreadsheet and I will show this in future post. Click on charts to enlarge.

Agilent Tech Inc


S&P500