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Using real market examples, see how relative performance, or RS analysis, can be used to pinpoint the market’s strongest (and weakest) sectors and individual stocks at any time.

Of all the technical tools that are available today, there is one that I think can help you find not only the strongest sectors, but also the strongest stocks within those sectors or industry groups.

It is a method that I use frequently in my daily Charts in Play feature, although I don’t always show it in graphical form. It is the relative performance, or RS analysis, which compares one market to another by plotting a ratio of the two markets.

Most analysts just use it to compare the percentage change of a market average—like the S&P 500—to a particular sector or stock.

Since the 1980’s, I have always analyzed indicators like the price charts. I often use moving averages on the indicator, as well using trend lines to identify support and resistance levels. I have found this can be a very useful way to identify the winning sectors and stocks, while at the same time avoiding the losers.

Relative Performance (RS Analysis)

Figure 1

Click to Enlarge

Most investors would likely pick Apple (AAPL) as the top stock of the past few years. Therefore, I thought it would be interesting to see how the RS analysis performed on this key tech stock.

This daily chart goes back to late 2007. On the bottom is the relative performance, or RS analysis. In the latter part of 2008, the RS was in a downtrend (line d), as major resistance at the 2008 highs (line c) was evident. This downtrend was broken in late-January 2009 after the RS had formed higher lows.

On January 22, 2009, I noted the basing action in AAPL and felt that a breakout above $97-$100 on heavy volume should complete the bottom formation.

Apple made higher lows (line b) in March with the RS in a well-defined uptrend at that time. On March 18, AAPL closed above $100, and on April 6, the major bear market resistance in the RS, line c, was finally overcome. The OBV also completed its bottom formation.

For the rest of 2009, the RS was in a solid uptrend, line e. While the overall market was topping in April and May, the RS continued to move higher. The first sign of weakness was in March 2011, when the uptrend (line e) was broken. A drop in the RS below the April lows will start a pattern of lower highs and lower lows.

NEXT: How to Find Which Stocks Are Leading the Market