Relative Strength Analysis: An Example
Indian Equities Market has been scaling new highs almost in regular intervals & last Friday we got a yet another life time high for Nifty at 9595. Yes, the market is overbought in the short term; yes, there is a chance of Interest rate hike by FED in June; yes, there is a significant possibility of short term pull back from present levels. But what do they mean for us, the traders? Should we look for shorting opportunities here? The answer is a thumping NO!
We are trend followers by heart & we understand that no high is high enough. Our job as traders is not to predict market reversals but to take risk & manage them. However high is the price, whatever the FED might be doing with its interest rate policy, we just believe in trends. As long as the trend is up, which it is, our job is to trade from the long side of the market & manage risk. That’s all! Let the experts do all their talking! We only understand the risk & trade with Stop Loss.
Let’s come to business. In NSE, we have some 20 sectoral indices like Nifty Banks, Nifty IT, Nifty Auto etc. Even during a strong bull market such as this (& any other markets), there are relative outperformers & underperformers. A Relative Strength Analysis is a comparison of goodness of performance of any one stock/sector with another one (Please note that Relative Strength Analysis is not equivalent to RSI, a popular momentum indicator that is commonly referred to). Now, a quantitative analysis of Relative Strength of 20 sectoral indices reveals that Nifty FMCG Index has been the most outperforming sector in the past 1 month. So, this week we pick our long recommendation from this sector.
Tata Global Beverages (CMP 146.90)
The stock was recently subjected to a selling pressure but Friday’s price action suggests that the pullback is likely over & the longer term uptrend might push prices higher from current levels. Buy 50% at CMP 146.90, add remaining 50% if prices pull back to 144.50 regions, keep stop loss at 140, and lets hope for a target of 159.
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