Friday, December 19, 2008

Relative Strength- why it shouldn't be ignored.

My only trade today was UPS which turned out to be a loser. I entered at 10:10ET. Same story with the way I usually enter and how I position my stop (Entry 52.96, Stop 53.16)The stock selection was fine...the warning to get out came when I noticed the relative strength of the stock compared to the market...

If you study the 1min chart of UPS and, for example,the SPY (you could use the DIA index...same idea)between 10:10ET and 10:20ET, you'll notice the stark contrast in terms of RS. The downside wave created between those times in UPS is much slower than the equivalent downside wave in the SPY. To get a bit more mathematical about it, the difference between the close of the 10:10ET min bar compared to the close of the 10:20ET min bar in UPS is 2 cents compared to the massive 24 cent difference in the SPY- 0.04% to the downside compared to 0.26% respectively. Basically, when a trade should be going in the direction of the market and it's not...act with caution- cut the position down in share size, tighten stops or just get out, regardless of where you are in the trade (that means no "waiting till it gets back to even". Chances are you'll just end up taking the full stop)

A quick look at the action in UPS after the market began to climb after the 10:20ish low confirms the strength in that stock as it broke through the resistances I had been playing off of.

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