Relative Strength

In the many past posts, I have recommended that to be successful in swing trading, one has to be aware of the individual securities relative strength as it compares to some index of its peers.

The following chart is an example of  OIH which is the oil VanEck oil services ETF. I have compared this ETF to SPY, which represents the Standard & Poors 500 index.

 

The prices are as of the close yesterday, January 12, 2021.

The rules are very simple, and the action indicated by the up and down arrows reflects the result of following the rules.

  1. Buy when the target security is stronger, on a relative strength basis than the index.
  2. Buy ONLY when the target is stronger, has positive momentum, and the index is also going up.
  3. Close the position when any condition is violated. Shown by blue vertical lines.
  4. The rules apply to shorting when the actions are the opposite of the buy rules.

Market Timing and Other Examples at Year end 2020

In many past posts, I have tried to illustrate the relative strength of market sectors. The example below is as of year-end 2020.

In my previous post on Market Timing in early December, the illustration below shows that the market trend as portrayed by the ETF “SPY” is still intact. Prices as of the close on December 31, 2020

I am also showing below, another example of relative strength with positive momentum is APPL versus QQQ.

 

The rules in this example are pretty straightforward. Only buy APPL when it is outperforming QQQ AND QQQ is also in an uptrend.

The green arrows show these events. There are many different strategies that can be developed based on these events occurring.

Relative Strength with Momentum

Readers of the swingtrader.com blog will have noticed that the overall theme that I have proposed is that to be a successful swing trader one has to understand the principle of relative strength with positive momentum.

I originally proposed the concept in an e-book that I had offered in 2000. Because of my lack of web marketing, it was only downloaded a few times, although it was free.

Over the past few months, I have received multiple offerings of momentum services that offer similar strategies that I have been discussing on my swingtrader.com, relativevalue.com and perfectstormtradingstrategy.com websites for the past ten years or more.

One of the offers was a service, using only four ETF’s, that the provider stated would constantly beat the market.

Over the next few weeks and months, I am going to have on the swingtrader.com website an example, updated weekly or daily if necessary, of my 4 ETF strategy. If followed, the strategy should emulate the best of the services being offered. It is certainly not a recommendation of what to buy or sell, but an example of what can be accomplished by using a relative strength with momentum strategy. It is for illustrative purposes ONLY!

The four ETF’s chosen are the result of my own research. They should portray a representation of the changes in market sector rotation. The four ETF’s have a positive and negative correlation with each other. The ETF’s are displayed here on daily charts.

I will update the daily charts when appropriate.

Remember, Green=XLE, Energy. Red=XLY, Consumer Discretionary. Light Blue=XLU, Utilities. Yellow=XTN, Transportation.

Latest update July 11, 2019, 8:00 AM