REFS is
a mine of invaluable information for the private investor.
Selecting shares without its help is like trying to
clap with one hand tied behind your back.
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Common
characteristics of the relative strength plot
The relative
strength plot tends to show a number of common characteristics.
Historically, markets have continued to rise in line with the
momentum of global economic growth. As the market rises, the
price of the average share also tends to rise over the long
term. If the share price of this average share faithfully tracks
the rising movement of the market, then its relative strength
plot remains absolutely horizontal. In a rising market, therefore,
share price plots should show an upward trend, with relative
strength plots tending towards the horizontal. Thus in most
cases, under average market conditions, the relative strength
plot (the broken line) tends to run beneath the share price
plot (solid line).
However,
when conditions take a downturn, these effects are reversed
for the duration of a falling market. This is visible in the
graph when the share price plot descends more quickly (or rises
more slowly) than the relative strength plot. Over a longer
period of market depression, the relative strength plot of the
average company tends to run above the share price plot.
This can
be illustrated by visualising a company whose share price moves
perfectly in line with the market. For such a company, the relative
strength plot is a perfectly horizontal flat line. In a rising
market, the share price plot for that company is going up all
the time, i.e. rising above the horizontal relative strength
plot. In a falling market, the opposite will occur, and the
share price plot for that company is going down all the time,
ie. falling below the horizontal relative strength plot.
In a market
which is completely flat, for any given individual share price
trend, the relative strength plot tracks it precisely. If the
share price goes up, the relative strength plot rises with it;
if the price plot moves downwards, the relative strength movement
is identical.
In practice,
the normal pattern lies somewhere between these extremes. The
market tends to be rising, and therefore both the price plot
and its relative strength follow an upward trend, with the price
plot rising slightly faster. The rate of change for the price
itself is greater than its rate of change relative to the market
as a whole.
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