Looking for strong stocks? Deepvue's RS Line is your answer. Discover how this key tool can transform your investing approach.
What is Relative Strength?
Relative Strength is a comparison of the performance of one stock relative to another or, more commonly, to a benchmark index such as the S&P500 or NASDAQ Composite.
Relative Strength is based on the concept that a stock that is in high demand and being accumulated by institutions will show strong price performance compared to the overall market, especially during sideways markets or corrections.
Institutions use these periods to accumulate their highest conviction ideas. This accumulation leaves subtle cues even if a stock is declining. The RS line as we will get into, can help highlight these accumulation signatures.
Conversely, a stock that has no demand will have poor price performance and underperform compared to the rest of the market. It has weak relative strength and the RS line will magnify its weakness.
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Visualizing the Relative Strength Line
Like price and volume, Relative Strength can be visualized. It is most commonly represented with a simple line.
The Relative Strength line shows how a stock is performing over a certain time period compared to the benchmark index, usually the S&P500.
Relative Strength Line Calculation
The Relative Strength line is calculated by dividing the price of the stock by the price of the index it is being compared to.
Relative Strength Value = (Price of Stock/Price of Benchmark)
The resulting ratio is plotted on a chart. The ratio value itself is not a useful metric, but the trend of the line is highly valuable.
With enough historical price data, you can plot all the calculated ratios for the specified time period, usually daily or weekly, to visualize the relative strength line.
The Significance of the Relative Strength Line in stock trading
Almost all indicators are some derivative of price and volume. Most indicators such as MACD and Stochastics are lagging indicators.
Relative Strength however is a leading indicator, meaning it shows us ahead of time what price is likely to do. If we pay attention to the RS line it will give us early clues as to the potential price performance, up or down, of a stock.
Important Points:
- The trend of the RS line is key. Minor peaks and valleys in the line are normal as price fluctuates but the trend should be upwards.
- An upward-trending RS line suggests the stock is outperforming the market, while a downward trend indicates underperformance.
- In a Bull market, an RS line leading price higher or staying flat during price consolidation indicates sustained demand.
- A declining RS line can be a warning sign of dwindling demand and a potential price decrease.
- During a market correction or Bear market, a flat or rising RS line indicates resistance against downward pressure and support from institutional accumulation.
- Stocks with flat or upward-trending RS lines during a correction are the market's strongest, likely to outperform once the uptrend resumes.
Unique features of Deepvue's Relative Strength Line
Deepvue's Relative Strength line has all the unique features you need in this tool to transform your trading and investing strategy.
Compare to any index or ticker: By default, the Deepvue Relative Strength Line is set to compare a stock to the S&P500 ETF SPY.
However, it is fully customizable and can be changed to another index, such as the NASDAQ 100 ETF QQQ, or any other ticker to see if a stock is outperforming similar stocks in the same industry group.
Moving Average: The Deepvue Relative Strength Line features a customizable Moving Average. You can select any length of moving average you want and can also choose between Simple Moving Average and Exponential Moving Average. The default setting is the 21-day Simple Moving Average.
Crossover indicator: When the RS line crosses over the moving average an indicator icon will be visible along the bottom to give a quick visual reference that the trend of the RS line might be changing.
Visual Clues: A green dot will appear on the RS line so you can easily tell when the RS line is making a new high. Similarly, when the RS line makes a new high before price, a pink dot will show on the line giving you a visual clue your stock is outperforming the overall market.
Customizable: The Deepvue Relative Strength Line indicator is completely customizable. The line can be plotted as a simple line or candlesticks. Choose from a wide variety of colors, shades, icons, and line thicknesses to make the indicator uniquely yours and match your preferred color scheme. You can easily toggle on/off features that are less relevant to you.
Example of identifying strong stocks using Deepvue's Relative Strength Line
Let's take a look at how you can use Deepvue's Relative Strength line to identify strong stocks.
The chart below is Docusign (DOCU) on a weekly timeframe with the Deepvue RS line at the top, price in the middle, and Deepvue Enhanced Volume in the lower pane.
During the significant market correction of Feb-Mar 2020, when the S&P500 fell by 35%, DOCU stock showed high demand. This was evidenced by the rising RS line even when the price was stagnant or falling.
Deepvue's Relative Strength line, visually highlighted by pink dots, made new highs ahead of price, signaling institutional support and the potential for accelerated demand as the market rebounded.
DOCU's price subsequently soared by nearly 350% from its lowest point in March 2020 to its August peak within 25 weeks, with the RS line confirming the stock's strength throughout. Thus, the Relative Strength indicator successfully identified a potential market leader.
Fast forward a few months so we can see how the Relative Strength line can also be an early clue that demand for a stock has dried up and it might start underperforming and eventually decline.
Between October 2020 and February 2021, despite DOCU's price reaching new highs, the sideways-to-downward trend of the RS line hinted at underperformance. This divergence, with the RS line no longer leading the price, served as an early warning.
Subsequently, DOCU experienced a 30% correction as new price highs saw selling pressure, indicating institutional withdrawal. The RS line's trend thus provided early signals of diminishing demand and potential underperformance.
Sticking with DOCU for our final example, we can see how the RS line can keep you out of laggard stocks and show you when it is time to exit a position and avoid massive drawdowns.
From July to September 2021, despite DOCU's attempts at new price highs, the declining RS line failed to confirm the price movements, indicating underperformance.
The decisive warning was the RS line's sharp drop below the 21-day moving average. This preceded DOCU's major correction where it lost over 85% of its value.
By heeding the RS line's warning, traders could have averted significant losses, demonstrating the RS line's power as a leading indicator.
You will notice in this example we did not need any other indicator to help us identify if demand for a stock existed. No moving averages, no Fibonacci's, no MACD.
Price, Volume, and Deepvue's Relative Strength line are all you need to find the next market leaders and avoid wasting your hard-earned capital on the laggards.
Putting it all together
Deepvue's fully customizable Relative Strength Line is a leading indicator and the best tool for traders and investors to find the next market leaders and avoid laggard stocks.
Using Deepvue's RS line, traders can identify early signals of stock demand or dwindling demand, informing them when to enter or exit a position.
You can start charting with the Deepvue RS Line today and try it out for yourself!
Frequently Asked Questions (FAQs)
