Tuesday, December 1, 2009

Relative Performance: Eyeball It

One of the simplest methods available for executing relative performance is eyeballing it. This process simply involves assessing the two charts you're interested in comparing to determine which is stronger. Remember, the primary cornerstone of technical analysis is that market action discounts everything. In essence, any and every factor that could influence a stock's price is already reflected in the price. If you subscribe to that notion then your trading decisions are probably based off of a stock chart as opposed to other extraneous factors such as news, fundamentals, etc...

So rather than using a relative performance chart as I did in the last post regarding this discussion, let's simply compare the chart of SPY to IWM in an effort to determine which one is exhibiting relative weakness. Though some traders may use secondary indicators such as the MACD or Stochastic, I prefer to get right to the heart of the matter by focusing on price and price alone. Something as simple as comparing the last three pivot highs will suffice (click image to enlarge).

[Source: EduTrader]

Over the past few months the SPY (left chart) has been able to form three consecutive higher pivot highs. The IWM (right chart), on the other hand, formed an equal pivot high followed by a lower pivot high. It takes all of one second to determine IWM is exhibiting relative weakness. Whether they know it or not, most traders intuitively consider relative performance as they're scrolling from chart to chart. Let's try another: SPY vs. DIA
[Source: EduTrader]

Notice how they have both formed three consecutive higher pivot highs. Rather than taking this at face value and assuming they're both equally strong, we could assess the distance between the pivots to determine which trend is exhibiting more momentum. As you can see the DIA moved a lot further on its most recent upswing. Thus, it's fair to say DIA is exhibiting relative strength vs. SPY.

For related posts, readers are encouraged to check out: