Education & Information
Broad Market Relative Strength Charts
Broad market relative strength charts record the percentage of stocks in a broad market index that are on a buy signal on their individual stock relative strength charts. A broad market index is one that covers an entire market such as the NYSE or NASDAQ regardless of the industry sector the stock is in.
The best market conditions exist when a large number of stocks are performing better than the overall market. Dangerous market conditions exist when a few stocks are working to push the market higher. When a market advance has broad participation, more stocks will be giving buy signals on their RS (relative strength) charts. You will see a broad market RS chart, such as the NYSE’s in a column of Xs indicating an increasing percentage on a buy signal. A column of Os means narrow participation and is a sign of weakness in the broad market.
Along with the NYSE and NASDAQ bullish percent charts, these RS charts are a valuable tool to help you with an overall market approach.
Typically, the NYSE’s and NASDAQ’s broad relative strength charts are moving in the same direction. However, at times they can diverge. At these times it is necessary to focus your new investments in the market that shows good relative strength and avoid the market showing weak relative strength. For example, in 1999 and early 2000 the NASDAQ’s RS chart was advancing while the NYSE’s was declining (see the charts below). This told us that while overall market conditions were good for the NASDAQ, they were dangerous for the NYSE. Fittingly, the NASDAQ made a substantial advance during that time frame while the NYSE under performed the NASDAQ. This divergence in their RS charts could have helped one focus their efforts on the NASDAQ during that time frame, while avoiding the NYSE.
In early 2000, both of these charts reversed course almost simultaneously. The NASDAQ’s, which had been advancing in a column of Xs reversed down in to a column of Os, while the NYSE’s, which had been declining in a column of Os reversed up in to a column of Xs. The change in these broad market RS charts indicated market leadership was changing from the NASDAQ to the NYSE and should have helped in both selling your NASDAQ positions prior to the crash in this market and focusing your new investments in the NYSE, which has held up much better.
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