Relative Strength

 

Relative Strength

There are two types of Relative Strength: Relative Strength of Price and Relative Strength of Volume.

• Relative Strength of Price: This concept measures how strong a stock's price is compared to a market index or other stocks. (Examples include William O'Neil's RS Rating and Mark Minervini's combination of the VCP pattern with relative strength.)

• Relative Strength of Volume: This concept analyzes how explosively a specific stock's volume is surging compared to the market's average volume, rather than just looking at the price. Market masters place a much greater significance on "relative strength accompanied by volume" than on a mere price increase.

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The top-tier traders featured in Jack Schwager's Market Wizards series utilize Relative Strength (specifically Price Relative Strength) in the following ways:

• Selecting Stocks Stronger Than the Market (Identifying Leading Stocks): When the overall market index (e.g., S&P 500, KOSPI) is moving sideways or declining, a stock that holds its ground or even rises is viewed as evidence that powerful buying force (the "main player" or institutional money) is entering the stock.

• A Leading Indicator Before Earnings Announcements: As one of the famous phrases in the book goes, "It is common for relative strength to break out before a surprising earnings report is released." It is crucially used to capture phenomena where a stock price moves stronger than the market ahead of insider information or major positive news being made public.

• Finding Hidden Gems in a Bear Market: When the index plummets, stocks that drop less or show downside rigidity have a very high probability of becoming the 'leading stocks' that shoot up first and fastest when the market rebounds. Market wizards unanimously agree on this point.

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The "relative strength" mentioned up to this point refers to the relative strength of price.

Technical analysis is about analyzing the market based on price and volume. Suppose a certain stock experiences a breakout accompanied by volume. However, looking at its trading value (turnover), it is only about 10 billion KRW. While it might look like volume is exploding when looking at that individual stock's chart alone, it is insignificant compared to the market as a whole. A trading value of less than 10 billion KRW is less than the trading volume of just a single trader mentioned in the previous post, Market Wizards of Korea. Can massive institutional capital ever enter a stock like this, where a single stop-loss after buying would send it straight to the lower price limit?

When looking at trading value rankings, there are plenty of stocks with high relative trading value that trade hundreds of billions or even trillions of KRW a day. Trading a stock like DKLOK, which doesn't even make it into the top several hundred in trading value rankings, means you are trading a penny stock (junk stock).

This does not align with the true spirit of Relative Strength.

Though it is just my personal speculation, I believe Jack Schwager interviewed these masters but failed to ask the crucial question himself: Relative Trading Value (Dollar Volume). The masters in Market Wizards probably didn't bother to answer things they weren't explicitly asked about.

• Relative Strength of Volume: This concept analyzes how explosively a specific stock's volume is surging compared to the market's average volume, rather than just looking at the price. Market masters place a much greater significance on "relative strength accompanied by volume" than on a mere price increase.

Volume should be viewed as Dollar Volume (Trading Value) to select stocks that are strong relative to the market. Leading stocks are found among those that have a high relative trading value ranking combined with strong relative price performance.