By Thierry Laduguie
In my recent article “how to use relative strength (see article), I mentioned the importance of a strong relative strength. There are a few reasons why stocks with strong relative strength are a good bet. Firstly, these stocks will perform well in a bear market, in other words they are defensive. In general they are found in sectors like utilities, tobacco, pharmaceutical, food and drink. Secondly, after a correction they present a buy opportunity.
I will reiterate my criteria for buying a stock with strong relative strength:
1. Select a stock with rising relative strength over the last 6 months to a year
2. On a daily chart use a 55-day moving average and the RSI 14
3. Buy each time prices drop to the moving average or when the RSI is oversold (below 30)
Well, today we have a few stocks satisfying this criteria:
Diageo (DGE)
The main trend is up. The relative strength line (blue line) has been rising for more than 6 months. The stock is below the 55-day moving average (red trendline). The RSI (bottom of the chart) is near oversold at 39.
Apple (AAPL)
The main trend is up. The relative strength is up over the last six months. The stock has pulled back below the 55-day moving average and is still above the 200-day moving average (red line). The RSI has dropped to oversold (30).
These stocks are a buy based on this strategy, however, if the stock market is entering a bear market Diageo and Apple will struggle to move up. I would closely monitor the general trend in coming weeks and as soon as the stocks rally I would move my stop loss closer to the opening levels in case it’s a bear market and the stock market continues to decline.
Thierry Laduguie is technical strategist at e-Yield
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