As mentioned always, Technical Analysis is a method of probabilities, not certainties. Therefore, it is always better to add another form of analysis on top of it. This post serves to introduce the concept of Sector Relative Strength in improving trading profitability.

Relative Strength compares the performance of a stock, exchanged traded fund or mutual fund to the overall market. This comparison is use to identify counters that are outperforming or underperforming the market to make buy or sell decisions respectively. Some common markets use for references are the Dow Jones, Standard and Poor 500 and the Nasdaq Indices. Therefore what is Sector Relative Strength? It is the comparison of a particular sector to the market, represented by the S&P 500 Index. For example, figure 1 shows the performance of the Information Technology (IT) sector relative to the market. It can be seen that the IT Sector has been outperforming the S&P 500 index for the past few months. With this information in mind, more focus shall be put into screening bullish counters in this sector. Via my screener, a potential trade has been scanned out on Yahoo. On figure 2, Yahoo has recently formed a hammer candlestick pattern, confluence with previous resistance turned support at 41.38.

In summary, it is always good to adopt a top down approach in trading. This allows you to have a macroeconomic view of sector performances in identifying high probability trades in the right places.

Figure 1. Relative Strength of IT Sector with S&P 500 Index

 

Figure 2. Yahoo Chart