Outperforming the Markets Using Relative Strength and Breadth Analysis by Prashant Shah

Author:Prashant Shah
Language: eng
Format: epub
Publisher: Notion Press
Published: 2021-09-14T00:00:00+00:00

If you notice, we have four sections in the above fusion matrix:

• PF Performance Score = Scoring based on the pattern in the price chart.

• PF Ranking Score = Scoring based on swing momentum in the price chart.

• RS Performance score = Scoring based on the pattern in the RS chart.

• RS Ranking score = Scoring based on swing momentum in the RS chart.

Stock picking

There can be many ways to identify trading opportunities using this table.

A simple and common rule is to focus on buying opportunities in stocks where the total performance and ranking scores are positive. Look for short trades in those stocks where the total performance and ranking score are negative. Do not remain long in stocks having negative total performance or a negative ranking score. Using this simple template, you can ensure that the weak or underperforming candidates are eliminated from the portfolio.

As a rule of thumb, for trading and investment, stocks with total performance and ranking scores above zero should be on your bullish watch list. These stocks are bullish on price and relative strength charts on multiple timeframes. You can analyze them further to identify affordable breakout or retracement entry opportunities. Similarly, the stocks with a total performance and ranking score below zero should be on your bearish watch list.

Buy a stock once its total score turns eight and keep a stop-loss on the price chart at the double-bottom sell level. This way, you will be buying outperformers and high momentum. Stocks with a total performance score of seven must be on the bullish watch list. Long positions may be considered at the bullish swing breakout level in the shorter timeframe. Once the breakout happens, the total performance score will then turn eight. There can be instances where the total performance score is less than seven but may turn eight when the trend turns bullish.

Hence, focus on stocks having a total performance score above four and a total ranking score above zero. This combination typically captures bullish candidates that can offer fresh entry opportunities. Similarly, stocks with a total performance score below -4 and a total ranking score below zero are considered bearish. Focus on such candidates for shorting opportunities.

Stocks whose total performance or ranking score turning positive, or negative are the ones where reversal is in progress. I have studied the mean reversion techniques using this table. Stocks having a total score of eight would exhaust at some point so a reversal trade may sound interesting or logical. The problem with this approach is that these reversal trades work at times but the overall success ratio is low.

A better approach to trade reversals would be to focus on candidates where the total performance and ranking scores are flipping over from a negative to positive score or vice versa in the fusion Matrix. Remember, the scores in the fusion matrix are not calculated based on a single column or a pattern of one timeframe. It is calculated over multiple timeframes and on price and relative strength charts.

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