THE MAGIC OF RELATIVE STRENGTH · 2020-06-29 · THE BIG Relative Strength Study PICTURE The...

JUNE 2020

Gautam Shah (CMT, CFTe, MSTA)+91 98300 35900 | [email protected]

THE MAGIC OFRELATIVE STRENGTH

Disclaimer

• The content of this presentation is only for the information of the participants and not to be construed as investment advice. Please consult your financial advisor before acting on it.

• SEBI Registered Research Analyst – Goldilocks Premium Research

Disclosure (SEBI RA Regulation)1. Whether the research analyst or research entity or his associate or his relative has any financial

interest in the subject company and the nature of such financial interest.2. Whether the research analyst or research entity or its associates or relatives have actual/beneficial

ownership of one percent or more securities of the subject company (at the end of the month immediately preceding the date of publication of the research report or date of the public appearance).

3. Whether the research analyst or research entity or his associate or his relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance.

4. Whether it or Its associates have received any compensation from the subject company in the past twelve months.

5. Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months.

6. Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

7. Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

8. Whether the subject company is or was a client during twelve months preceding the date of distribution of the research report and the types of services provided.

9. Whether the research analyst has served as an officer, director or employee of the subject company.

10. Whether the research analyst or research entity has been engaged in market making activity for the subject company.

1. No

2. No

3. No

4. No

5. No

6. No

7. No

8. No

9. No

10. No

THE BIGPICTURETechnical Analysis - Thoughts

• Technical Analysis is less and less of a science today. Markets are evolving

• Timing has become more and more important in the current market environment

• Buy and hold investing might not be very rewarding anymore

• Combining chart analysis with fundamentals and flows is the way forward

• Risk Management has become the single most important part of the trading/investing process

• How markets react to “news” has become more important than the “news” itself

• A holistic approach to technical analysis is extremely important in today's day and age

• Charts are never wrong, the analysis is !

THE BIGPICTUREMy Bear Market Learning's

• The new-age bear markets are defying traditional logic

• Weak can get weaker to the point of disbelief

• The market moves up the stairs and falls off the Elevator

• There always comes a point where fundamentals, logic and common sense is meaningless

• Resistance levels work brilliantly in bear markets just how supports work beautifully in bull markets

• The market is generally far ahead of the “bad news”

• History does not and need not repeat itself. Always a “new” bear market is round the corner

• Human tendency is to fight the outperformers in a bear market. Get over it. Stay with the losers !

• Relative Strength, Moving Averages and Dow Theory are the best tools to navigate bear markets

THE BIGPICTURERelative Strength Study

The Concept

• This is the study of one stock or sector in relationship to other stocks/sectors or the market itself

• We compare a security's price change with that of a "base" security

• Comparative relative strength is not to be confused with Welles Wilder's Relative Strength Index (RSI)

• This technical study can give a better look at where the money may or may not be flowing

THE BIGPICTUREIdentifying Mega Trends

Microsoft Vs S&P 500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 202005

101520253035404550556065707580859095

100105110115120125130135140145150155160165170175180185190195200205210

0.015

0.020

0.025

0.030

0.035

0.040

0.045

0.050

0.055

0.060

Relative Strength Comparative(S&P 500 INDEX) (0.061612, -0.000118)


Why Is This Technique Relevant

• Helps to capture underperformance in a bear market & outperformance in a bull market

• Stay ahead of the curve, sometimes even the newsflow

• Gauge the weakest sectors/stocks compared to the benchmark

• Get an early warning signal well before the “traditional” technical studies

• Trade Pairs. Low risk, high returns. Generate Alpha

• Confirm price action breakout with ratio chart

• Unlike other technical tools does not quantify weakness or strength

• Helps to “stay in the game”


Traditional Technical Analysis On Ratio Charts

• Like on any price chart, apply commonly used technical tools on a ratio chart

• Basic Trend Analysis using the concept of “Dow Theory”

• Use of Patterns to understand phases of outperformance or underperformance

• Use of trend lines to understand a sudden shift or change in trend

• Use of moving averages to smoothen the study further

• Use historical levels to understand how good or bad the current price action is

• Look for bullish or bearish divergences in relation to the price action


Ways To Use It

• Most Popular - Stock vs Index (Example – Apple/Dow)

• Stock Vs Stock in same sector (Example – Apple vs Facebook)

• Stock Vs Stock across sectors (Example – Apple vs Boeing)

• Local Index Vs Global Index (Example – DAX vs S&P 500)

• Relationship across sectors (Banking vs Telecom)

• Relationship across asset classes (Gold Vs Dow)

• Relationship across segments of the market (Mid-cap index vs Small cap index)


The Template To Identify Mega Downtrends

• Step 1 : Look For Relative Strength Divergence on the weekly chart

• Step 2 : Simultaneously look For RSI Divergence

• Step 3 : Wait for a break of the 20-day moving average

• Step 4 : Watch for bullish pattern failure right at the top and a reversal pattern thereafter

• Step 5 : Dow Theory confirmation to stay in the trend

• Step 6 : Look for above average volume activity as a confirmation


Example I : The Template Example – Yes Bank (INDIA)

Apr May Jun Jul Aug Sep Oct Nov Dec 2015 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2018 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 Mar Apr May Jun Jul Aug

5000

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x100000

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0.000

0.005

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0.015

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0.035

Relative Strength Comparative(* CNX NIFTY) (0.002845, -0.000092)


Example I : The Template Example – Yes Bank (INDIA)

Apr May Jun Jul Aug Sep Oct Nov Dec 2015 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2018 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 Mar Apr May Jun Jul Aug-30-20-10

0102030405060708090

100110120130140150160170180190200210220230240250260270280290300310320330340350360370380390400410420430

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90Relative Strength Index (40.0632)


Example II : Citigroup (USA)

May Jun Jul Aug Sep Oct Nov Dec 2016 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2018 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 Feb Mar Apr May Jun Jul Aug

5000

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x100

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0.00170.00180.00190.00200.00210.00220.00230.00240.00250.00260.00270.00280.00290.00300.00310.00320.0033

Relative Strength Comparative(DOW JONES INDL AVG (DJIA)) (0.0020455, +0.0002430)


Example III : American Airlines (USA) – Bear Market Captured

Aug Sep Oct Nov Dec 2016 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2018 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 Feb Mar Apr May Jun Jul Aug

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0.022

0.023Relative Strength Comparative(S&P 500 INDEX) (0.003946, +0.000664)


Example IV : United Health Group (UHG) – Bull Market Captured !

Nov Dec 2008 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012

-5

0

5

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0.0020

0.0025

0.0030

0.0035

0.0040

0.0045

1520253035404550556065707580Relative Strength Index (53.7189)


Example V : Home Depot – A Solid Uptrend

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

05

101520253035404550556065707580859095

100105110115120125130135140145150155160165170175180185190195200205210215220225230235240245250255260265270275280

NOISE !

0.0015

0.0020

0.0025

0.0030

0.0035

0.0040

0.0045

0.0050

0.0055

0.0060

0.0065

0.0070

0.0075

0.0080

0.0085

0.0090

0.0095

0.0100

0.0105Relative Strength Comparative(DOW JONES INDL AVG (DJIA)) (0.0095739, +0.0000402)


Example VI : Intel – Outperformer In The Making ?

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

10

15

20

25

30

35

40

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50

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0.00130.00140.00150.00160.00170.00180.00190.00200.00210.00220.00230.00240.00250.00260.00270.00280.00290.00300.00310.00320.00330.00340.00350.0036

P P P P PP

P

k

Relative Strength Comparative(DOW JONES INDL AVG (DJIA)) (0.0023089, +0.0000045)


Example VII : Identifying Strong Names In A Bear Trend - Apple


Example VIII : Nasdaq Vs S&P 500 – Ratio Chart Tells A Story

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1.25

1.30

1.35

1.40

1.45

1.50

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3.75Ratio Top : 3.62

Current : 3.22

Relative Strength Comparative(S&P 500 INDEX) (3.22544, +0.01467)


Example IX : STI / S&P 500 – Critically Placed At Multi-year Cycle Low


Example X : Australian ORDINARIES / S&P 500 – Good But Not Good Enough !

A M J J A S O N D 2008 A M J J A S O N D 2009 A M J J A S O N D 2010 A M J J A S O N D 2011 A M J J A S O N D 2012 A M J J A S O N D 2013 A M J J A S O N D 2014 A M J J A S O N D 2015 A M J J A S O N D 2016 A M J J A S O N D 2017 A M J J A S O N D 2018 A M J J A S O N D 2019 A M J J A S O N D 2020 A M J J A

2800290030003100320033003400350036003700380039004000410042004300440045004600470048004900500051005200530054005500560057005800590060006100620063006400650066006700680069007000710072007300740075007600

2010

1.71.81.92.02.12.22.32.42.52.62.72.82.93.03.13.23.33.43.53.63.73.83.94.04.14.24.34.44.54.64.7Relative Strength Comparative(S&P 500 INDEX) (1.93829, +0.04054)

THE BIGPICTURECONCLUSION

• The Relative Strength Comparative study is a simple tool to identify large trends early

• While many technical studies are “seasonal” in nature, this tool is evergreen and super effective in the best and worst of times

• One of the few technical tools that help you get close to market tops and bottoms

• This study could have been effectively used to capture the recent fastest bear market in history

• Combining the RS study with other traditional technical studies builds a near fool-proof system

• As traders, investors, money managers it is a handy tool to navigate bull/bear markets in a practical way

Happy Trading/Investing !

Mail : [email protected] Phone : 98300 35900 Twitter Handle : gshah26

Website : www.goldilocksresearch.com

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THE BIGPICTUREABOUT GOLDILOCKS

Goldilocks Premium Research has been founded by Mr. Gautam Shah, CMT, CFTe, MSTA (Distinction) with the visionto cater to the large trading and investing community. The company’s foundation is based on honesty, sincerity andclarity.

Goldilocks’ vision is to capture big trends using technical analysis and present the same to its valued subscribers ina simplistic manner. The company believes and follows the motto: "You Grow, We Grow!" Goldilocks’ goal is toensure that subscribers associated with the company are able to maximize the financial markets and achieve theirfinancial goals.

Mr. Gautam Shah has been felicitated with Zee Business’ India's Best Equities Technician award and is well-knownin the advisory field. With over 500 media interactions to his credit, Mr. Shah is sought out by the best in thebusiness due to his incisive understanding of the market and astute forecasts. A self-made individual, his journey isan inspiring one. In 2003, Mr. Shah joined JM Financial as a trainee and climbed the corporate ladder quickly tobecome a Director and Chief Technical Analyst at the firm, before parting ways in September 2019. He and theGoldilocks team recently won at the Technical Analyst Awards 2020 declared in London.The team were adjudged winners in three categories :

1) Technical Analyst Of The Year2) Best Emerging Markets Research3) Best Specialist Research

www.goldilocksresearch.com

http://www.goldilocksresearch.com/

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