Stock's Relative Strength Line Can Flag Future Weakness
Enviado: 3/7/2003 16:01Investor's Business Daily
Stock's Relative Strength Line Can Flag Future Weakness
Thursday July 3, 10:04 am ET
By Craig Shaw
Stocks don't move in isolation. It's important to know how your stock is performing against the broad market. One way to find out is to consult the Relative Strength line.
This gauge, available on IBD daily and weekly charts at investors.com, compares a stock's price action to the S&P 500. It's a great way to find out if your stock is beating the benchmark. A less obvious use is to flag a tired stock's top, helping you lock in well-earned profits.
When a stock breaks out of a basing pattern to fresh highs, you want the RS line to breach new high ground as well. This action confirms the stock has the power to maintain its uptrend. If the RS line hits new high ground ahead of the breakout, even better. Many of history's best stock leaders have flashed this sign of exceptional strength.
Even great stocks need time to rest. As your stock pauses for breath after a big run-up, keep eyeing the RS line. It will likely sag below its peak. That's healthy action, as long as the slope isn't too steep.
But as the stock climbs the right side of its new base, the RS line should regroup as well. If the gauge lags below its old high as the stock launches another breakout, watch out. The stock may lack the energy to mount another run. Even worse, a breakdown might be in the wings.
VeriSign enjoyed a massive run-up from its January 1998 IPO to its February 2000 peak at 258.50 (Point 1). It vaulted over 400% in the last four months of its run alone. The digital Web security firm turned profitable in 1999 and amassed triple-digit sales growth the past two years.
Like many techs, VeriSign ran out of gas in March, correcting 65% in six weeks. The stock found support near its 200-day moving average and started shaping another base.
It attempted to break out the week ended Sept. 29, 2000 (Point 2). But its new base had several strikes against it. It was wide and loose, with extreme weekly price swings. The stock had climbed within 23% of its 52-week high; proper handles form within 5%-15% of that peak.
Finally, its Relative Strength line was nowhere near its February peak (Point 3). The stock was lagging the benchmark, a forecast of failure. Deep-pocketed institutions, which power up to three-fourths of the market, had fled to cash or found other places to put their money.
The flaws added up. VeriSign slipped below its pivot the very next week and skidded 65% by year's end. It now trades around $14.
Stock's Relative Strength Line Can Flag Future Weakness
Thursday July 3, 10:04 am ET
By Craig Shaw
Stocks don't move in isolation. It's important to know how your stock is performing against the broad market. One way to find out is to consult the Relative Strength line.
This gauge, available on IBD daily and weekly charts at investors.com, compares a stock's price action to the S&P 500. It's a great way to find out if your stock is beating the benchmark. A less obvious use is to flag a tired stock's top, helping you lock in well-earned profits.
When a stock breaks out of a basing pattern to fresh highs, you want the RS line to breach new high ground as well. This action confirms the stock has the power to maintain its uptrend. If the RS line hits new high ground ahead of the breakout, even better. Many of history's best stock leaders have flashed this sign of exceptional strength.
Even great stocks need time to rest. As your stock pauses for breath after a big run-up, keep eyeing the RS line. It will likely sag below its peak. That's healthy action, as long as the slope isn't too steep.
But as the stock climbs the right side of its new base, the RS line should regroup as well. If the gauge lags below its old high as the stock launches another breakout, watch out. The stock may lack the energy to mount another run. Even worse, a breakdown might be in the wings.
VeriSign enjoyed a massive run-up from its January 1998 IPO to its February 2000 peak at 258.50 (Point 1). It vaulted over 400% in the last four months of its run alone. The digital Web security firm turned profitable in 1999 and amassed triple-digit sales growth the past two years.
Like many techs, VeriSign ran out of gas in March, correcting 65% in six weeks. The stock found support near its 200-day moving average and started shaping another base.
It attempted to break out the week ended Sept. 29, 2000 (Point 2). But its new base had several strikes against it. It was wide and loose, with extreme weekly price swings. The stock had climbed within 23% of its 52-week high; proper handles form within 5%-15% of that peak.
Finally, its Relative Strength line was nowhere near its February peak (Point 3). The stock was lagging the benchmark, a forecast of failure. Deep-pocketed institutions, which power up to three-fourths of the market, had fled to cash or found other places to put their money.
The flaws added up. VeriSign slipped below its pivot the very next week and skidded 65% by year's end. It now trades around $14.