RELATIVE STRENGTH

The Erlanger Technical Rank

Relative strength is a time tested tool of technical analysis. Not to be confused with the RSI oscillator, relative strength is simply the price of a stock divided by and index (usually the S&P 500). A rising relative strength trend depicts a stock who's price action is better than the average stock. A declining relative strength trend uncovers weakness "relative" to the average stock. The attractive nature of relative strength analysis is that such trends tend to persist. This is easy to understand... we may not fully understand why a trend is in force, but if the relative strength is strong (or weak) enough, the forces at work behind these trends are likely not random, and therefore have some lasting effect. Because trends of relative strength tend to persist, when they do change, this is a significant event.

This chart shows the relative strength for Micron Technology (MU) when it had its parabolic climb back in the mid 1990s. This is a classic study of relative strength trends persisting.

THE ERLANGER TECHNICAL RANK

The Erlanger Technical Rank is a nonlinear representation of a stock's relative strength line. It is on a scale of 10% to 100% - with increments of 10% only. Each of these 10 measures (10%, 20%, 30%...100%) is in actuality a separate relative strength pattern or shape. 10% is the worst shape while 100% is the strongest. The higher the Technical Rank, the stronger price action of the underlying stock relative to the average stock.

Here is the chart of MU with its Technical Rank:

One of the great features of the Technical Rank is that it is normalized - that is, one can compare one stock's Technical Rank to another. One of the advanced series of Erlanger data is compositing the Technical Rank into Groups and Sectors.

ERLANGER TECHNICAL RANK OF GROUPS AND SECTORS

A very helpful tool is the Average Technical Rank of groups and sectors. Because our group and sector measures are arithmetic, any group and sector observation is not capitalization weighted - this enables a truer measure of group and sector trends. IT IS BEST NOT TO GO AGAINST AN OBSERVED GROUP OR SECTOR TREND.

The above chart shows both the group (semiconductors) and sector (electronic technology) average Technical Rank for MU. Being long when these measures are in uptrends and while the stock price is above the DMAs (displaced moving average lines) worked quite well in an otherwise psychologically difficult stock to trade. The reverse is also true - shorting while these group and sector average Technical Ranks declined and while the stock price was below the DMAs was timely.