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Power of Relative Strength Approach
  • : January 5, 2021
  • : B. Krishnakumar

Power of Relative Strength Approach

Though we have talked and discussed a lot about the importance of using relative strength or ratio charts as a primary tool to filter candidates, I get a feeling that the importance of it is not fully appreciated by many. I consider this post as a reinforcement of the importance of the concept for myself and hope it strikes a chord with the readers as well.

Let us consider the case of Nifty Metals which has been popping up at the top of the heap in the Total RS Ranking Score. Nifty Metals has been appearing in the Top 5 or 6 candidates since early November 2020. Here is the RS chart of Nifty Metals versus Nifty 50 in 1% Renko chart.

Four things

If you notice, the metals sector has displayed relative strength for a while now. The weak breakout and reversal happened way back in April 2020. The ratio chart has since been trending up with higher swing highs and higher swing lows. There was a multi brick breakout in early November 2020 and the price has also managed to get above the Super Trend. By the way, am a big fan of multi brick breakout in Renko, especially for RS charts. I run this scanner in RS charts regularly across brick sizes to identify breakouts in RS chart.

To appreciate the importance of the outperformance, let us look at the Performance Table of the Metal stocks since November 5 till date. This one month return also coincides with the multi brick breakout in RS chart.

If you notice in the table below, quite a few large names have delivered handsome returns in this one- month period. Tatasteel tops the table with a return of 46.4% which is not bad for a large cap stock. Many of us (including yours truly) are guilty of chasing multi baggers and ignore the low hanging fruits. This post is an effort to change the perspective for you and for me as well.

Nifty metals is still an outperformer and tops the Total RS Ranking table. Have a look at the latest RS Ranking score of NSE All Indices versus Nifty 50. The table is sorted in the descending order of the Total RS Ranking Score.

If you notice, Nifty Metals is still at the top of the table suggesting that it is an outperformer. You can do
further chart analysis and short list candidates from the Metals sector. But what I find interesting is the Nifty PSU Bank & Nifty Private Banks that have popped up in the list for quite some time now. Also of interest is the Nifty CPSE & Midcap 50 index.

I had a look at the volume signature to identify stocks where there is a pickup in volume and wanted to use this as a starting point to short list candidates. Let me share an example and am sure you will get the drift of the process. Let us consider Nifty PSU banks.

Here is the output of the “Volume Scanner” which is available under the Smart Scanner menu. I have used Nifty PSU Banks as the universe here. Remember, the idea is to identify stocks where the volume is increasing.

Canara Bank which is the second stock in the above table is something that interests me. It is one of the bigger banks from the PSU sector. I ignore MAHABANK as it is one of those relatively smaller banks. Let us
study CANBK chart further and check if we have an opportunity now.

The daily candlestick chart indicates massive consolidation in CANBK for several months. The regular Friday webinar attendees would recognize that I am a big fan of consolidation breakout in daily and/or weekly candlestick charts. So, CANBK is an interesting choice for me. As highlighted, volumes are picking up which is positive sign.

In the Renko chart above, price is on the verge of triggering a multi brick breakout (yes, am a big fan of this pattern too). And the moving averages are on the verge of a positive crossover in 3% Renko chart.
Things are looking interesting and I would initiate a long position above 117 with a stop loss at 95. Stop loss is below the moving averages in 3% Renko chart.

You can also adopt a similar approach in other outperforming sectors such as PSE or Realty too. Or use any other approach that suits you, to identify candidates.

If you are an aggressive short-term swing trader, you may also choose to trade continuation buy signals in 0.25% box size. Or you can use such continuation signals to pyramid your positions too.