Section 10 - Chapter 10 - Relative Strength & its Uses

Section 10 - Chapter 10 - Relative Strength & its Uses - Presented by Rohan Sharma - The CMT Coach - Chartered Market Technician CMT Level 1 Study Material - CMT Level 1 Chapter Wise Short Notes - CMT Level 1 Course Content - CMT Level 1 2025 Exam Syllabus

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1. Chapter 9 – Relative Strength & its Uses SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

2. Agenda Relative Strength and its Uses Introduction to Relative Strength Relative Strength to Assess the Market Environment Relative Strength for Stock Picking Using Relative Strength This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

3. Relative Strength Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

4. Relative Strength Key Facts & Cheat Sheet on Relative Strength (RS) to Assess the Market Environment 1. What is Relative Strength (RS)? Relative Strength measures the performance of one asset relative to another (often a benchmark like the S&P 500). It helps identify leading and lagging stocks, sectors, or asset classes. 2. Types of Relative Strength • Price Relative Strength (PRS): Compares a stock’s price performance to a benchmark index (e.g., $AAPL vs. S&P 500). • Relative Strength Index (RSI): A momentum oscillator (0-100) used to assess overbought/oversold conditions. • Comparative Relative Strength: Compares two assets (e.g., Growth vs. Value, Stocks vs. Bonds).

5. Relative Strength Key Facts & Cheat Sheet on Relative Strength (RS) to Assess the Market Environment 3. How to Use Relative Strength in Market Analysis • Identify Market Leaders: Stocks with strong RS tend to outperform in bull markets. • Sector Rotation: Strong relative strength in certain sectors (e.g., Technology > Utilities) can indicate market trends. • Risk-On vs. Risk-Off Sentiment: Rising RS in defensive sectors (e.g., Healthcare, Consumer Staples) suggests a risk-off environment. 4. Key Relative Strength Metrics • RS Line (Price Ratio): Stock Price ÷ Index Price (Uptrend = Outperformance, Downtrend = Underperformance). • RS Rank (IBD Method): 1-99 ranking based on past 12-month performance vs. peers. • RSI (Relative Strength Index): Above 70 = Overbought, Below 30 = Oversold.

6. Relative Strength 5. Cheat Sheet for Market Conditions Using RS Market Condition RS Behavior Actionable Insight Bull Market Growth stocks & cyclicals show strong RS Favor high RS stocks in leading sectors Bear Market Defensive sectors (Healthcare, Utilities) show RS strength Reduce exposure to weak RS assets Sector Rotation RS shifts from one sector to another Adjust portfolio to follow RS trends Overbought (RSI > 70) Stock/index has rallied too fast Consider taking profits Oversold (RSI < 30) Stock/index deeply undervalued Look for reversal opportunities 6. Tools to Measure Relative Strength • Trading View / Think or Swim / Bloomberg Terminal • StockCharts.com (RSI, RRG - Relative Rotation Graphs) • Investor’s Business Daily (IBD RS Ratings) By tracking Relative Strength, traders and investors can spot market leaders, avoid weak assets, and position themselves in the strongest sectors. 🚀

7. Relative Strength Key Facts & Cheat Sheet on Relative Strength (RS) to Assess the Market Environment 3. How to Use Relative Strength in Market Analysis • Identify Market Leaders: Stocks with strong RS tend to outperform in bull markets. • Sector Rotation: Strong relative strength in certain sectors (e.g., Technology > Utilities) can indicate market trends. • Risk-On vs. Risk-Off Sentiment: Rising RS in defensive sectors (e.g., Healthcare, Consumer Staples) suggests a risk-off environment. 4. Key Relative Strength Metrics • RS Line (Price Ratio): Stock Price ÷ Index Price (Uptrend = Outperformance, Downtrend = Underperformance). • RS Rank (IBD Method): 1-99 ranking based on past 12-month performance vs. peers. • RSI (Relative Strength Index): Above 70 = Overbought, Below 30 = Oversold.

8. The Beach Ball Effect Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

9. The Beach Ball Effect 1. What is the Beach Ball Effect? The Beach Ball Effect refers to the tendency of a stock or asset that has been heavily suppressed (due to selling pressure, news, or market conditions) to rebound explosively once the pressure is lifted—just like a beach ball being pushed underwater and then released. 2. Key Causes of the Beach Ball Effect • Oversold Conditions: A stock has been pushed too low, often irrationally. • Short Squeeze: Heavy short interest can lead to rapid covering and a price surge. • Fundamental Catalyst: Positive news, earnings surprises, or regulatory changes. • Market Sentiment Shift: Broader bullish sentiment or sector rotation into the asset.

10. The Beach Ball Effect 3. Interpretation in Trading • Stocks Under Accumulation: If strong buyers step in despite a price decline, a powerful rebound may follow. • RSI Below 30: Indicates oversold conditions, increasing bounce potential. • Volume Surge After a Drop: High volume with a slight price increase suggests accumulation. • Breakout from a Base: If a stock has been suppressed for a long time, an upward breakout can be explosive. Cheat Sheet for the Beach Ball Effect Market Condition Indicator to Watch Actionable Insight Oversold Stock RSI < 30, heavy decline Watch for reversal signals High Short Interest Short interest > 20% Potential short squeeze setup Unjustified Drop No bad news but price declines Look for institutional accumulation Breakout After Long Consolidation Volume spike, price above key resistance Strong buy signal Sudden Price Explosion Huge volume + strong price move Could signal a sustained uptrend

11. The Beach Ball Effect 5. Example Scenarios • A fundamentally strong stock falls due to market panic but rebounds once fear subsides. • A heavily shorted stock gets unexpected good news, leading to a massive squeeze. • A growth stock consolidates for months, then breaks out on earnings. Final Tip: 🔹 A suppressed stock with strong fundamentals + technical confirmation = High bounce potential! 🚀

12. Relative Strength (RS) as a Leading Indicator Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

13. Relative Strength (RS) as a Leading Indicator 1. What Does It Mean for RS to Be a Leading Indicator? Relative Strength (RS) can signal future price movements by identifying outperforming stocks or sectors before the broader market confirms a trend. High RS stocks tend to lead in bull markets, while weak RS stocks lag or decline further in bear markets. 2. Why RS is a Leading Indicator • Strong RS Stocks Tend to Keep Rising → Stocks with rising RS often outperform the market. • Sector Rotation Insights → Increasing RS in specific sectors signals where institutional money is flowing. • Market Trend Confirmation → A stock’s RS improving before a price breakout signals strength. • Weak RS Warns of Underperformance → Stocks with falling RS often lag the market or decline further.

14. Relative Strength (RS) as a Leading Indicator 3. How to Use RS as a Leading Indicator Market Condition RS Behavior Actionable Insight Bull Market Beginning RS in growth stocks rising before the market Look for leaders & early breakouts Sector Rotation RS increasing in a new sector (e.g., Tech → Energy) Shift exposure to strong RS sectors Stock Breakout Setup RS rising before price breakout Buy early before trend is obvious Bearish Warning RS declining despite index rising Reduce exposure to weak stocks Market Weakness Defensive sectors gaining RS (e.g., Healthcare, Utilities) Risk-off shift → Consider hedging 5. Example Use Cases 2020 Tech Rally: RS in tech stocks (AAPL, AMZN, NVDA) surged before the market confirmed a full bull trend. 2022 Energy Boom: Energy stocks showed rising RS early, signaling sector strength before oil prices peaked. Bear Market Warnings: Weak RS in growth stocks in late 2021 hinted at trouble before the 2022 decline.

15. Relative Strength (RS) as a Leading Indicator 4. Cheat Sheet for Spotting Market Leaders with RS RS Signal Interpretation Actionable Step RS Line Rising Above Benchmark Stock outperforming the market Favor these stocks for long positions RS Line Flat While Market Drops Stock showing relative strength Sign of resilience—watch for breakout RS Rank > 80 & Price Consolidating Market leader in setup phase Prepare to buy on breakout RS Line Falling Stock lagging Consider avoiding or shorting Defensive Sectors Gaining RS Market risk-off shift Adjust portfolio to defensive plays Final Tip: 🔹 Stocks & sectors with strong RS often lead the next major market move—watch them closely!

16. Chapter 1 – Meaning to Volatility to a Technician Next Section 11 – Volatility Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia