NIFTY INDEX VS STOCK Relative Strength
Relative Index is a ratio of a stock price performance to a market average performance. It is used in technical analysis. It is not confused with RSI indicator. To calculate the relative strength of a particular stock,divide the percentage change over some period by the percentage change of a particular index over the same time period.A stock with a higher relative strength than the overall index often shows a strong investment opportunity.Relative strength is a technique used in momentum investing and identify value stock.The goal of relative strength investing is to buy high and sell even higher.
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Relative strength analysis is simply dividing one market element by another. If this number is increasing, the one you divided it into is stronger; if this number is decreasing, the one you divided by is stronger. You can use this to compare a market sector to the economy in general, or you can pick a company and compare it to the sector’s performance.
In essence, it’s a stock that is showing strength relative to the market. Say the Nifty is down 1% on the day, yet Reliance is up 1%. That’s a stock showing relative strength – the ratio has gained 2% (1%+1%) .
On a one-day measure, relative strength isn’t all that convincing. But say the market is going through a really choppy period or is under a lot of selling pressure for a prolonged stretch. When a stock is standing tall during that period of time, then it’s really worth a closer look.
Don’t confuse a falling RS with a falling stock price. You can easily have a rising stock with a falling RS but it just means that the stock is climbing moderately less than its benchmark, lets say Nifty.
There are Four Scenarios When Using RS:
Price ↑ + RS ↓ = Stock climbs less than Nifty
Price ↑ + RS ↑ = Stock climbs more than Nifty
Price ↓ + RS ↑ = Stock drops less than Nifty
Price ↓ + RS ↓ = Stock drops more than Nifty
These calculations therefore present a great view of the “relative” momentum of the stock versus the market.
Relative strength plays are often a good place to “hang out” during market turbulence, but they usually outperform when the market comes back to life as well.
In essence, it’s a stock that is showing strength relative to the market. Say the Nifty is down 1% on the day, yet Reliance is up 1%. That’s a stock showing relative strength – the ratio has gained 2% (1%+1%) .
On a one-day measure, relative strength isn’t all that convincing. But say the market is going through a really choppy period or is under a lot of selling pressure for a prolonged stretch. When a stock is standing tall during that period of time, then it’s really worth a closer look.
Don’t confuse a falling RS with a falling stock price. You can easily have a rising stock with a falling RS but it just means that the stock is climbing moderately less than its benchmark, lets say Nifty.
There are Four Scenarios When Using RS:
Price ↑ + RS ↓ = Stock climbs less than Nifty
Price ↑ + RS ↑ = Stock climbs more than Nifty
Price ↓ + RS ↑ = Stock drops less than Nifty
Price ↓ + RS ↓ = Stock drops more than Nifty
These calculations therefore present a great view of the “relative” momentum of the stock versus the market.
Relative strength plays are often a good place to “hang out” during market turbulence, but they usually outperform when the market comes back to life as well.