Relative Strength (RS)

Relative Strength (RS) is a technical concept that measures the relationship between two securities (or assets) where one security is divided by another, and the result is plotted as a continuous line. It is often used to compare which asset to buy vis a vis another and also helps in understanding inter-market relationships. The most common use of RS is to compare the security with the market index (Nifty or Sensex). When the line is rising that means the stock is outperforming the market and vice versa. Divergence between the RS and the security, warn of latent strength and weakness. Since RS moves in trends like the price, therefore it lends itself to trend reversal techniques such as patterns, trend line breaks, and moving average crossovers. Very Important point to keep in mind is that RS is a RELATIVE indicator just as its name implies. A rising or falling line doesn’t mean the security is advancing or declining in price, it merely suggests that the said security is outperforming the broader market. Any Divergence or trend line break in RS has to be confirmed by price action. It can either be in the form of a completion of price pattern, a trend line break or an important moving average crossover. To further illustrate my point. I will use my favorite stock ONGC and also RANBAXY which has caught the fancy of many a people out there. Both the charts are self-explanatory. What I intend to show here, my friends, is that RS is a powerful tool for stock selection and also gives advance warning when it is time to move to an another security.