Standing on the shoulders of giants: Relative strength

W.D. Gann from Truth of the stock tape
"If you are waiting for an indication to buy stocks, you
want to select the strongest stock in a certain group, as the
stock which is in the strongest position is naturally the one
that will lead in a Bull market and the one in weakest position
will lead in a Bear market."

"Suppose in 1920 or 1921 you were watching and waiting
to buy one of the Motor stocks. Note that the low price
on Studebaker in 1917 was 34; again in 1918 low 34. The
high in 1919 was 152. It declined to 38 in December, 1920,
holding 4 points above the support levels of 1917 and 1918,
which showed that it was in a strong position. However,
the general group of Motor stocks in the Spring of 1921
did not show any sure signs of having made bottom, but
Studebaker led the advance."

Larry williams from "The secret of selecting stocks for immediate and substantial gains"

"COMPARATIVE STRENGTH, THE SECRET TO FOLLOWING ALL STOCKS
Many people have been amazed that I can follow just about all stocks traded and
in an instant tell if the stock has been under basic accumulation or distribution.
There's really nothing to it other than an understanding of the preceding
paragraph.
You see, to spot professional accumulation, all we need to do is find an example
of steady and determined buying in the face of a weak stock market. When this
happens we have a good idea that professional buying is taking place.
Professional selling will show up when we see consistent and determined selling in
the face of a strong market. That is, when the market is surging up, but selling
pressures enter a particular stock we can bet that we have a stock undergoing
professional, informed selling."


Gr8 minds think alike? Or plagurism? No way to tell :)
As gann would say there is nothing new under the sun (which by the way he quotes from some other source which i cannot recall now)
Human psychology is the same it was 10,20,50,100 years ago. I don't think any significant evolutionary changes have yet occured in the human brain.
Some techniques have withstood the test of time.
Relative strength analysis is one such technique.

I would like to add my own corrolary to relative strength.
When a stock with mega high relative strength comes with good news it is more likely to get sold.
Reason: all those people who never follow the trend but follow the news finally have a reason to buy. The insiders have a reason to book profits. They created the high relative strength in the first place by continuously buying even when the market was selling!!
So imagine you are a trader you watch this stock go up and up and up and you don't buy. You keep thinking why is it going up? Instead of looking at what it is doing.
Finally when the news comes you jump in impulsively without looking at stuff like fibonacci targets etc. You will often end up buying the high or selling the low.

As usual caveat applies. If the new is earth shattering, huge funda news which could have an impact for few months/years then you never know the stock might reaccumulate at higher levels before going up.
However the fact remains that at the moment when the good/bad news comes on a high/low rs stock it will be extremely vulnerable to a correction.


Want examples??
Siemens bad news gap down 1030 now at 1200(13 month ema)
mphasis 32x top on buyback offer
ipcl 320 top on buyback offer for 350
reliance recent top on good news 1630 fib t3
indiacements top 242/254, buy back offer 264.

When i started to trade the markets I kept a notebook where I had my own list of patterns. One such pattern was what i called the 'double jump'
It looks like a double top except it doesn't break down significantly.
Maybe goes down by a few pts below previous low but then moves up violently.
This is what is called a flat correction in EWT :)
So perhaps larry williams did discover r/s independently but since gann wrote about it first I would say he should share the credit for 'larry williams' million dollar idea'.

Btw r/s works insanely well. it is the ultimate filter for any trend following system.
But like every other approach there are caveats :)
Read my corrolary, r/s works till good/bad news arrives; the reason why the insiders were making the abnormal move in the first place.
Once the abnormality is out into the open there is no longer an abnormality left to make crazy profits from.
Want an example?
Keep tracking sesagoa.
offer price 2032
it has already topped there once on good news. Offer is still valid.
could form a major top near 2030 area before working its way to lower levels.

Aban lloyd fccb conversion around 2750 news came few days ago when stock was near 2660-2700. Could form a top near 2750 area
Right now the stock is heading for support near 2450 or so and will probably require some time for distribution.
remember distribution can easily continue on the way up.
and you will often see 5-10% trading ranges as the stock distributes
Confirmation of distribution is only below the range.