MarketSmith Tools – Part III
In this series, we analyze features in the current version of MarketSmith, in the hopes of pointing out why we find the software so invaluable. In this article, we will examine the relative strength line and a chart of Charles Schwab (SCHW).
“A stock’s Relative Strength line compares a stock’s price performance versus the S&P 500 index. Many charting services plot a RS Line along with the stock’s price, moving averages, etc. The line is derived by dividing the stock price by the S&P 500 Index value. An upward sloping line means that the stock’s price is outperforming the S&P 500 Index.” – William O’Neil
Charles Schwab (SCHW) – Relative Strength line
Reference is made to the six (6) week base starting in October and the five (5) week base in December. Note the Relative Strength line started moving higher as the stock began to break out. In many cases, the RS line began to point higher “before” the stock broke out of its consolidation.
Considering most investors and traders are plagued by exiting winning candidates too soon, an astute participant would be paying close attention to the slope of the RS line. As the slope steepens, stick with the trade. As the slope of the RS line peaks or flattens, reexamine your thesis and tighten your stops. If the RS line is dropping, maybe consider a short or no position at this time.
What is the MarketSmith relative strength line saying now?
The trading room scaled into Schwab after earnings, attune to its rising RS line and improving fundamentals. Sales and earnings exceeded our criteria. In addition, as you look at the table in the upper left quadrant, you can see analysts are busy ratcheting up their estimates for 2018 (^ 47%) and 2019 (^ 19%). Therefore, as long as the RS line rises and heads toward ever higher values, we will allow this trade to work its magic.
Sales and earnings are a feature of IBD.
A Consistent Workflow Breeds Success
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This step in our workflow means we 1) scan for stocks with sales and EPS% change greater than 30%. In addition, 2) we look for stocks that are moving higher on volume, the topic of the first part of this series.
We like to say, “if you want a stock to move higher, it only makes sense to pick candidates with improving fundamentals.” That means we screen for improving sales, earnings and profit margins.
Add a measure of technical analysis like MarketSmith provides and your consistency will improve.
Over time, these steps will become habitual and so will your consistency.
Additional articles are forthcoming, so stay tuned for more on “How we use MarketSmith in our Workflow.”
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Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.