Stocks in the Strongest Stocks list are sometimes nearly vertical in their ascent. To find a good entry point for those stocks, it is helpful to review them with interval charts. For example, a twenty-day chart showing 1-hour intervals rather than days reveals the smaller "pullbacks" more common with those stocks. On the other hand, some people simply look for attractive charts based on days rather than hours and "jump on board" using close stop losses. It is possible to get a 1-month return in some of these stocks that most people would be elated to see in a 1-year investment (sometimes, only a week will do it).
When we say a stock is "strong," we are referring to strength that is far superior to that measured by the Relative Strength Index (RSI), a mathematical tool popular with traders. The word "relative" is misleading when used in reference to the Relative Strength Index. Unlike our own algorithm, it is not a measurement of how strong a stock is relative to other stocks, and it is usually based on a "snapshot" time frame of only 14 days. Traders look for a divergence between the Relative Strength Index and the price action of the stock. If the stock makes a new high but the Relative Strength Index does not, this divergence suggests a reversal is likely. The Relative Strength Index is a rather simplistic measurement that is based on the ratio of upward price changes to downward price changes over 14 days. Our own strength indicator is far more complex. If you scan 2000 stocks with the Relative Strength Index, you will often find that the stocks that rank high are NOT attractive because of overhead resistance or because the surge of strength measured is not really significant for some other reason (a non-significant rebound in a bad pattern). The latest surge may be only a snap back reaction toward the previously penetrated neckline of a head-and-shoulders pattern (a very bearish configuration). The list selected by our own strength screens, however, will actually look far more attractive on a visual inspection. The more stocks that are screened, the greater the difference in output will be. When you look at our highest ranked "strength" stocks, especially when they are selected from among thousands of stocks as in our Strongest Stocks list, you will know you are looking at stocks that are really strong
The Problem With Basing Strategies on the RSI
The following was a highly rated stock based on its RSI (Relative Strength Index) reading. Measurements were taken on over 2000 stocks. They were then ranked in the order of their scores. The following chart shows a stock highly ranked by the RSI. The RSI is based on the movement of the stock during the last 14 days (the area in the red box). In the chart, 14 days covers only the last rise in the stock but misses the times the blue line acted as support or resistance. When the stock approaches the horizontal line from below hits the line and then falls, the line is acting as resistance. When the stock approaches the line from above, hits the line and bounces, the line is acting as support. That blue line is significant and at the time of the last 14-day price increase, it will act as resistance. The probabilities are very high that the stock will be turned back again. Look at the next chart. The symbol for the stock is MNTA. If a line acts as resistance 6 times and as support 3 times (as in this chart), all 9 times count as support or resistance, depending on whether the stock is above or below the line. In the chart, the stock is below the line. Therefore, we have 9 times in which the horizontal line has been tested and 9 times in which the stock has been turned back. The price is currently approaching the line for the tenth time. Every time a stock approaches a line of resistance and the stock is turned back, the line becomes stronger. A future check of the stock's chart will probably show that the stock did head south again after the date the chart was posted here. [We recently updated the cart and you can see what happened afterwards] The problem is that the RSI cannot see or "understand" that this is not an attractive stock because it cannot "see" beyond the last 14 days (the blue box in the chart). It sees only the last move upward. This stock was rated in the top 20 for strength out of thousands according to the RSI. Our own algorithm rejected it outright. It should be clear then, that though the RSI can find stocks that show recent strength, it can also turn up many stocks that are unattractive because of their overall pattern. What this means is that using the RSI to sort through thousands of stocks in an attempt to find the strongest will often result in a list that includes hundreds of stocks with unattractive patterns that must be visually inspected before being rejected as unattractive. There are better ways of using the time.
Our own strength algorithm can "see" more of a stock's behavior pattern. If our algorithm ranks a stock highly, it is far less likely to have created a pattern of overhead resistance (within recent months) that is just above the current price. There is no way that our algorithm would select a stock like the one in the above chart. The stocks ranked highly by our algorithm are much more likely to have charts that are similar to the following three charts taken from an actual report. They were all on the same report and there were dozens of other stocks on the list with variations in pattern but all very strong.
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