Technical Thursdays: Understanding Relative Strength
StatsEdgeTrading
Welcome to Technical Thursdays, where we break down real-world market movements to illustrate essential technical analysis concepts. Today, we’re focusing on relative strength using a real example from the semiconductor sector. Understanding relative strength is key to finding outperformers in a given market or sector.
Example: SMCI vs. Nvidia
Take SMCI as an example. Recent news led to a sharp decline in SMCI, but how could we have spotted this relative weakness earlier? By comparing SMCI to Nvidia or the SMH index (semiconductor sector), we can see that SMCI has consistently lagged, signaling potential trouble ahead
Relative Strength Indicators:
Eyeball Comparison: Simply overlay charts and compare how close each stock is to its recent highs. SMCI fell far below its highs, while Nvidia and SMH held up better.
Moving Averages: By using tools like the 50-day or 200-day moving averages, you can objectively compare the relative strength of stocks within the same sector. Stocks above their moving averages, like Nvidia, are typically stronger.
Key Takeaways:
Relative Strength matters—stick with stocks that outperform their sector.
Tools like moving averages provide objective ways to rank stocks.
Avoid laggards like SMCI and focus on sector leaders like Nvidia.
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