Relative-Strength Analysis of Commodities. In stock market work, relative-strength analysis is very common. Portfolio managers move their money into those stock groups they believe will lead the next stock market advance or, in a down market, will decline less than the other groups | 11 Relative-Strength Analysis of Commodities In stock market work relative-strength analysis is very common. Portfolio managers move their money into those stock groups they believe will lead the next stock market advance or in a down market will decline less than the other groups. In other words they re looking for those stock groups or stocks that will outperform the general market on a relative basis. The group rotation process is scrutinized to determine which stock groups are leaders and which are laggards. Stock groups and individual stocks are compared to some objective benchmark usually the Standard and Poor s 500 stock index. A ratio is calculated by dividing the stock group or the individual stock by the S P 500 index. If the relative-strength RS line is rising the other entity is outperforming the general market. If the relative-strength RS line is declining the stock group or stock is underperforming the market. There are two major advantages to the use of relative-strength analysis as a technical trading tool. First another confirming technical indicator is created on the price chart. If technical traders see a breakout on their price chart or some technical evidence that an item is beginning a move they can look to the relative-strength line for added confirmation. Bullish action on the price chart should be confirmed by a rising relative-strength line. Divergence can play a role as well. A price move on the chart that is not confirmed by the RS line can create a divergence with the price action and warn of a possible trend change. The second advantage lies in the ability to rank various items according to relative strength. By normalizing the relative-strength numbers in some fashion traders can rank the various groups or individual items from the strongest to the weakest. This will enable them to focus their attention on those items with the greatest relative strength if they re looking to buy or the lowest relative strength if they re looking to .
