Easily Identify the Strongest Sectors

01/05/2012 3:30 pm EST

Focus: STRATEGIES

Linda Raschke

President, LBRGroup, Inc.

Trader Linda Raschke discusses how she identifies the strongest (and weakest) market sectors using tools such as relative strength, intraday price charts, and more.

We’re talking about relative strength with Linda Raschke and how she uses it to find good opportunities in the futures market. So Linda, first of all, how do you use relative strength in the futures market?

There’s two ways that we use relative strength. The first way is on an intraday basis, and the second way is for longer-term positioning. 

In general, with relative strength, you are always looking to buy the stronger and sell the weaker, which is sort of counter to what we’ve brought up with our traditional American culture, which is “Buy on sale,” “Buy on discount.”

Everybody wants a bargain, so it’s a little bit harder for people to pay up for the thing that’s most in demand.

How are you seeing this on a chart, or is it a number that you’re seeing; below this number I am a seller, above it I am a buyer? How do you actually find it?

Well let’s talk first with using it on an intraday basis since we have a lot of daytraders in this business. 

Obviously, everybody is familiar with the four indices, the Russell 2000, the Nasdaq, the Dow, and the S&P 500. So for example, if we were just watching all four of these charts of a five-minute basis, what you’re looking for is just measuring one swing to the next swing. 

For example, if the Dow and the S&P make lower lows and the Russell and the Nasdaq make higher lows on just a five-minute retest, then in theory, the vehicle that you want to buy to go long on that non-confirmation would be the Nasdaq or the Russell, because they were the strongest; they didn’t pull back as much.

Of course, that translates to intermediate-term timing as well. 

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For example, if you look at the last market bottom that we made where the S&P made a lower low, but the Nasdaq made a higher low, the shares that were most in demand, and the index that outperformed the most on that rally that we had during the month of October was the Nasdaq and technology. 

From a pattern-recognition basis, that’s the first way. Now, the second way…I actually trade a lot of futures markets, and obviously everybody has noted the correlations now between the currencies, gold, crude, and the indices. You can call it “risk on, risk off,” you can call it “inflationary/deflationary psychology,” whatever name you want to give it, it’s basically global money flows.

See related: “Risk-on and Risk-off” Trades

Let’s just take five-minute charts of each of the currencies and the gold and the crude and the copper, and let’s say, for example, that the market sells off and crude makes a higher lower, but the rest of these markets make a lower low. If you’re looking to then position for a long trade to the upside, crude would be your vehicle to purchase, and obviously, we just saw a recent rally in crude oil that took it up above $100, while the other markets were underperforming. 

For example, natural gas, we’ll see relative strength lagged, making contract lows, but sometimes the tendency of people is to sit there and think “Oh, well I’ll buy the natural gas because it hasn’t moved.” Well there’s a darn good reason why it hasn’t moved: because there’s an overabundance of supply.

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