Swing relative strength versus an index proxy

Three questions before any rank

The five-step procedure is grouped into three questions: stance on the general market, which issues to consider, and when to commit.

That procedure first sets a long, short, or neutral stance from the general trend, then ranks individual issues, then checks implied extent and readiness, then times the commitment to a turn in the market.

The ranking step uses a relative-strength index: a quantitative score that compares each name’s percentage change between a fixed sequence of rally tops and reaction bottoms with the same legs on the market proxy, using a chosen number of recent swings as the lookback.

The index proxy is a compact basket of liquid, widely held leaders, or the full listed industrial average, used as the baseline path against which those swing-to-swing percentages are measured.

Stance decides what strength is for

Relative strength and weakness is whether an issue expands or shrinks its percentage moves versus the same proxy swings, and whether that character persists until supply and demand change the action.

In an advancing general market the method ranks relatively strong names as long candidates and treats relatively weak names as poor long candidates rather than as bargains. In a declining market that ranking is reversed for short candidates.

Editorial: once the stance is long, a laggard is not a bargain. Weakness versus the shared proxy path is a reason to leave the name off the long list.

Mark the same swings on every name

Relative strength is scored by marking the same important rally tops and reaction bottoms on the proxy and on each name, then comparing the percentage change between those points.

The illustrated proxy sequence between seven labeled swings is given as successive percentage changes of -9.538, +7.084, -4.769, +10.501, -5.117 and +6.994.

The baseline universe can be limited to the eight leaders that compose the compact wave proxy, or to all thirty names in the industrial average, instead of hundreds of issues.

The same path, three regimes

Shorter-term ranking uses the latest two legs after the last labeled high. Intermediate ranking adds the prior pair of legs. Longer-term ranking uses the full sequence from the first labeled high to the last, with more weight on the most recent legs if no name leads on every swing.

The same labeled path can be read as a trading range with little net upside from first to last point, as an uptrend from the third point onward, or as a short-horizon range over the last three points, so a later decline is consistent with some lookbacks and contrary to others.

That reading is a horizon-conditioned regime. The same labeled proxy path can read as a range, an uptrend, or a short-horizon range depending on how many legs are included, which then changes which relative-strength ranks are consistent with the stance.

Editorial: lock one shared swing map on the proxy before anyone is scored. The lookback you include can flip the regime call, and therefore which ranks are even eligible.

When the proxy is ranging

Inside a trading range, relatively weak names are the short-side candidates as the proxy nears range resistance, and relatively strong names are the long-side candidates as the proxy nears range support. Those names need not themselves be ranging.

That range-position filter favors relatively weak names on the short side near proxy resistance and relatively strong names on the long side near proxy support, even if those names are already trending.

The list is still a list

Relative-strength ranking versus the proxy is only the second screen. Later steps still judge implied extent and readiness because the ranked list can remain larger than available funds.