Hi traders, welcome to this video. Today I want to talk about the relative strength line again. I already made a video how you can add the relative strength line to TradingView.
and today I want to talk about more about the line itself. You can see here the indicator CRS SPX 30. So this is the comparative relative strength to the S&P 500. So this is the line or the indicator I want to talk about in this video. And the indicator is only doing one thing and it compares the price move from the stock to the S&P 500. And you can see very clearly and in a very simple way if the stock is able to outperform the S&P 500. And this is important for me because I only want to trade stocks which are much stronger than the S&P 500. Because I want a better performance than the S&P 500. And one of the first ingredients for a better performance is to trade.
stocks which are able to outperform the S&P 500. You can also take the Nasdaq for example or the IWM so the Russell 2000 if you want to but I personally compare it to a broader range of stocks and the S&P 500 is the index I use. It was also used or it is also used by investors business daily so by IBD or by by William O'Neill and the canceling method. And yeah, it's time-tested and proven. That's also a reason why I use the S&P 500. Just one word about IBD, Investor Business Daily, a great service I use by my own. They also have the RS line or relative strength line in their charts.
And they also offer a rating of every stock, so a relative strength rating. But the relative strength rating and the relative strength line are two complete different things. So the RS line is always comparing the stock to the S&P 500 and the RS rating from IBD is comparing the stock to all other stocks. For me, much more important is the SRS line and especially the slope. of the RS line.
And there are three things or three different slopes or three different states of the RS line I personally want to see. And let's start with the RS line. So you can see when the RS line is sloping upward So in that case here with Cloudflare, when the stock is in a very nice uptrend here and the RS line is going up, that means the stock is outperforming the S&P 500. That's exactly what I want to see. And this gives me confirmation or this gives me confidence that the stock is technically very strong and under accumulation.
So companies are buying the stock much. much stronger and this gives me confirmation that I'm on the right side when I take such a trade. So the first thing I want to see is an upward slope of the rs line and let's look here at a few stocks are prepared so the first one is as net and if we go back in in history you can see this the second in the second state i personally prefer or yeah which is my my absolute favorite state of the rs line and this is when the rs line reaches new highs before the price. And you can see that if we scroll a little bit to the right side and we hide the future bars and we move back here to the March 20 correction in the stock market, here you can see at the bottom, you can see the S&P 500, so SPX, and the S&P 500 was in a downtrend. And you can see that the that the RS line was up, although the S&P 500 was in a correction.
And that's okay, because you can see the stock price was also up. So that means the stock was really, really outperforming the S&P 500 at that time. And then you can see that the stock made a correction.
And in that time, the RS line was, yeah, or the RS line, it was down. did not mirrored the correction and it was only a very small dip here. And then you can see that on this bar here, on this bar, the RS line was already on a new high. So we can really go back to that bar here so that you can see it. The RS line was on a new high before the price and this is a sign This is a very very strong sign that the stock is outperforming the S&P 500 strongly.
And this is something you can always see when the market is in a correction. That makes it so easy for us as growth traders or as traders which are trading leading stocks. This makes it so easy for us to find the strong stocks.
Because the RS line is... strongly up during a market correction and there you can see that that yeah cloudflare was going up here the rs line was also going up then there was a little bit a very short period of underperformance and then the stock slowly took up yeah turn turn up to the to the upside and go higher And then you can see here that for example the rs line was going more or less sideways here while the price was going up a little bit so it was more an upward consolidation here. And that's always a sign that the stock is underperforming the indexes a little bit. But and this is something I also want to add here you must always see that in relation so that means when i go back here for example you can see that the rs line is still in an upward trend or still an uptrend here and yes it's going sideways a little bit but it's very close to the highs here so this is the first thing and it's still upward and that's So the RS line is never a reason to sell a stock. You should always sell a stock out of technical reasons.
And the RS line is only showing you or only giving you feedback about the performance or outperformance of a stock. Now you can see that only a couple of days of correction in the S&P 500 is enough so that the stock is able to outperform the market again. And yeah, Cloudflare was a very volatile stock here. So you can see always some periods or some times when the RS line is going sideways and also the price is going sideways. But what you must have in mind is always look at the slope.
The slope must be upward. This is the most important thing when you look. ad stocks.
Let's switch to another one here for example a growth generation and this is the third thing I want to see or the third state of the rs line I want to see and this is a very very steep rs line. So you can see here how strong the rs line is going up and how strong the rs line is going up into new high ground. The stock price too, so it was a very very very fast and very strong move here, but the steeper the RS line the better because it means that the stock is really really outperforming the S&P 500. And if we now look...
That type here of consolidation for example, you can see that's also something like an upward Consolidation so price is going higher and consolidating at the same time and I can see here before the consolidation there was an explosion in price and also an explosion in the RS line and also in volume so very perfect and then if you see something like that, so when when a When a stock is able to outperform the S&P 500 over a couple of days with a very, very strong move, then it is normal that you see some type of underperformance. Because the RS line is in that situation, it is so extended that the stock almost never reached the same level on outperformance. So it's normal that you see some consolidation also in the RS line. And then you can see here with new price highs. So the stock is breaking out to the upside here.
The RS line is confirming the new high, which is very important for a stock which is outperforming the stock. We will come to that in a minute later. But again, you can see here. The slope is still upward so everything is okay. It's not so strong at that moment but it's in a consolidation and then you can see the stock is skyrocketing and in that situation also the rs line is in a very steep uptrend.
Peloton was an or isn't as another example i want to show you during the correction here you can see a very similar behavior to very similar behavior in comparison to Cloudflare. You can see that the RS line here on that move here is printing a new relative high. So when you compare here on 27 February, so the price was here and the RS line was here.
And now when you see that move here on March 16, you can see that the price is not reaching the same level, but the RS line is on a new high, on a new relative high. And that's also a very strong sign of outperformance. So always when the RS line is leading, this is a very, very good sign because it means that... either the correction in the stock was not so strong in comparison to the S&P 500 or on the other side the up move was much much stronger than in the S&P 500. I think that was the case here with with Peloton and then you can see for example another yeah another great thing and this is you can see the same thing the you The price is, or the RS line is reaching a new high before price. And that's another great sign.
So, and then you can see that the stock also is exploding to the upside. And then you can see a very small situation of underperformance. And this is always a warning sign. It's not a selling sign or something.
It's just a warning sign. Where you can see that here the price is almost the same so both peaks reached that this upper resistance line here and the RS line was in downtrend of that situation. So the second up move here reached not the same price level as the first up move and that's a little bit of warning sign that the stock is consolidating or outperforming and then you can see that the stock was able to print new highs and also the the RS line.
Then you can see here another situation. That was not 100% precise. Let's take that one here.
Then you can see another situation here. A new high in the price here on August 3rd. Also a confirmation in the RS line. which is a very good sign. So that gives me the sign that everything is okay and then the stock consolidated a little bit and then you can see this very nice exhaustion run here which is also confirmed by the RRS line.
And now the stock changed its character and this is something you always want to yeah to put some attention to you can see that that the stock um went through a consolidation so that was absolutely okay but it's definitely a sign of underperformance because you can see that um the s&p 500 was up in the situation and the stock was more or less yeah i don't want to say in downtrend but it's trending down from price here and there you can see The price broke out very strongly with good volume here to a new high, then consolidated a little bit and then again was here and printed a new high. So just a minor high, but it was not reflected or not confirmed by the RS line. And this is something where you want to put some attention on, especially if the stock was...
already in a very strong uptrend and that could be a sign that now the performance or the outperformance in the stock is not so strong anymore. I will show you some other examples of that. Pinterest for example is a very good example for that.
By the way I made another video about Pinterest and the trade I did in Pinterest, so from the beginning to here, so a 70% up move I traded here. And one of the things why I also considered to exit the trade was the RS line, because you can see how flat the RS line was, although the stock was in an uptrend. So prices were still up, but the ERS line was going sideways. And this is a sign that the stock is not outperforming the market anymore. And, you know, when you, for example, as an investor or something, when you unload shares, so that means when you distribute shares into the markets and sell shares, you put pressure on the price.
And this is reflected in the strength and also reflected in the price. And this is why we saw this type of grinding higher slowly and a lot of selling and the volume was going down here. And in that situation, that was also a reason for me to be very cautious with a trade. Because I saw this divergence between the relative strength and the price itself. In that situation, when I see something like that, I'm more defensive and more willing to sell, especially after the stock already doubled or more.
So a very clear sign here when our S-line is going sideways and the price is still going higher here. Tesla, I also want to show you Tesla during the market correction because it shows you a very similar situation as we saw on NET and also in Peloton here. You can see a very, very strong correction here in Tesla.
during the market correction but if you look at the rs line you know in comparison to this very strong correction here the rs line is more or less just pulling back so from the visual From from the visual impression here. It's not such a strong correction in my my view but price always leads so price is more important than any indicator and If you are in such a strong correction in my case, for example, I would be definitely out of the stock But and then you can see how quickly Or how fast the RS line turns up again so and this is this is due to the strong outperformance of tesla so we saw very strong moves here 14 than 10 on the next day and of course this is a very very strong outperformance against the s&p 500 because the s&p 500 only moves just a few percent so and tesla is much much stronger here and then you can see um what i what i told you before you can see this sign of strong outperformance you know the the rs line is on a yeah not on a new high here but but at the same level as the price um here you can see and you can see here here here on on 20th february um the um the rs line um was at that um state here or the at that level so and at that price level here and now the same level is reached although the price is almost 40 us dollar below the same price level as on february the 20th so very strong outperformance and then you can see okay tesla was was going to the moon here um so um of course a very very strong stock and you can see always You know, if you look at the price and you can see, of course, the stock is consolidating and have some times of underperformance. And this is absolutely okay.
But then you can see just one or two days are enough to push the RS line to the same levels again. And this is a real sign of good outperformance. So and, you know, if the RS line is going sideways and...
is in zinc with a price that's really not a that's really not an issue or a problem because only a few days is enough and then the rs line can be on new highs um yeah let's look at billy billy um very similar situation you can see that the stock really underperformed the markets here for a long long time and you can see that here from july to november the stock is really underperforming the market and then only yeah one day or one breakout day is enough to put the rs line on new highs and confirming the price breakout so and you know what i want to say to you is that you that that you always should compare the price action to the RS line. So there are definitely some periods in the market and in the stock when the stock is underperforming the market. But if you look from a broader perspective at the stock, if you zoom out a little bit and you see what is the slope of the RS line, it's still...
still up. So, you know, the RS line is still up or the trend of the RS line is still up. And that's a great sign. So no problem.
And it can go to new highs very quickly. And a situation where we can see that at the moment in real time is with Amazon. You can see that here.
You know, Amazon went sideways. here and as we saw so the first div against was in that situation so we saw a new price high that was not reflected by the RS line that means the market the market or the S&P 500 was much stronger than Amazon then Amazon turned into consolidation here and was still going or the the our I our s line was trending down here But... Amazon will publish earnings in 13 days and just one day is enough to put the RS line back to new highs here.
But we can learn from that situation. So here, divergence to the S&P 500 and divergence to the RS line. And then you can see consolidation afterwards. So this is something you can see very often in stocks when they stop outperforming the market. So when they...
when when the um yeah when there is a divergence to the um to the rs line you can see that two things are happen very very often the first thing is the stock um will turn into consolidation or in a slight correction and the second thing what you can see is you see failed breakouts because the stock is not strong enough to um yeah to hold the new highs and then the stock is turning into a consignitation or correction. Apple is another example here of underperformance so you can see price high here and price high here Almost on the same level here and you can see that is not on the same level It's slightly below and that means the Apple is underperform The S&P 500 but that can change very very quickly if you see that the RS line is turning up again and Apple also and the price is turning up or go sideways or something but the RS line is is strongly up that means that Apple is resuming its outperforming and that's a very very good sign DocuSign is another candidate. You can see that here. The RS line is going sideways for a long time. The price is going just or went a little bit higher.
So that means DocuSign is definitely underperforming the market right now. But if the stock will break out here to the upside, that can change very, very quickly. So and, you know, it's not a reason to ignore a stock.
stock because the rs line is going sideways because if we now look a little bit from the bird perspective um on the stock here you can see that yeah the trend is still up you can see that um the the trend from the price and the trend from the rs line confirms each other and that's absolutely okay if we now look for example here at fiverr it's another candidate um from the March correction. Also a very very strong outperformer. You can see that the price also almost reached new highs or the RS line reached new highs before the price.
So the same thing here, same level of RS line. And the price was on a lower level, so very, very strong outperformance. And now you can see, of course, that it was one of the biggest winners in 2020 here.
And yeah, but you can see that... there are always periods where the RS line is going sideways but if you look from the bird perspective you can see that it's definitely going upward. I just want to show you one additional stock and that was spotify here i did not prepare that on my list but i traded this by myself and i personally i always want to make sure that and that the price is confirming the rs line and that was the case um on the day of the breakout so you can see here that was a very strong day and it reversed completely so you had a i think the stock was seven percent or something up on that day and the rs line was also on a new high and then the stock reversed completely and dragged the rs line down and what you can see before and this is what i want to highlight here you can see that the stock printed a very small new high here so a minor new high and that was not reflected by the um RS line here. I must admit that It's not a big issue, you know, it is normal that sometimes the RS line is not confirming the new high.
You want to prefer that, you want to put attention on that, that the RS line is confirming new highs, but sometimes... You can buy a stock and just one or two days later the RS line is steep upward and exploding to the upside because the stock is outperforming the S&P 500 again. case you can see that it very quickly reversed and yeah it was more or less a failed breakout in that situation and this is what i what i told you at the beginning of of this video so you when when the rs line is not in zinc with a price you either see that the that the stock will turn into a consolidation or a small correction or you see a lot of failed breakouts and when you see that you know that that the rs line is not confirming the new price high you can be defensive you can sell a little bit you can tie your stop loss a little bit so that you get stopped out much earlier and reduce your loss. You can see a very similar situation here in July. You can see the price was up here and the RS line was more or less sideways and what happened?
The price turned into a large consolidation and also if you look at that here know this it was a higher price level here so i will delete the drawings here it was a higher price level here so you can see price was on a higher level here and that was also a higher level but if you compare that with each other you know you can see that it's very similar so there was not big difference between the price levels here and that's also a sign that the stock is not able to outperform the markets strongly and you don't want to own underperformers because underperformers not only give you a bad performance with your portfolio but they are also very volatile they show a lot of failed breakouts they show a lot of pullbacks they go sideways when the market is going up etc you want to avoid those type of lagging stocks and by the way i made another video about lagging stocks you find that also in my youtube channel okay i hope that this video helped you to understand the rs line a little bit better and to sum it up again so the three states i observe in the rs line is either a divergence positive or negative so that means new price highs and um yeah not reflected by the But the RS line is a bad sign and new highs in the RS line and the price is not on the same level. it's a very, very good sign of outperformance. The second thing, I want to see a very steep uptrend in the RRS line, which helps you. And the third thing I want to see is a confirmation.
So when a stock printed a new high, it should be confirmed, not always on the same day, but on the next days by the RRS line. Okay, so you can follow me here on YouTube. Of course. of course, and if you have questions, you can leave a comment. Give the video a thumbs up if you like the video.
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