Separating the Wheat From the Chaff Using Relative Strength
There is a multitude of factors that enter into investors’ decisions to buy or sell a stock, other than fundamental analysis. Thus, keeping at least a partial watch on how a stock is acting, regardless of the fundamentals, can often save investors some headaches. One technical tool that allows you to do this is relative strength.
Relative strength is one of the oldest and most important tools in all technical analysis. While in recent years there have been various nuances of relative strength measurements which have been introduced, the basic concept of relative strength—comparing the relative price performance of X vs. Y over some time period in order to make future price projections—really remains the only simple measure an investor requires.
To illustrate the use of relative strength, we’ll examine one stock that showed declining relative strength relative to its industry group and the market as a whole before more fundamental problems began to appear.
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