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I’ve often mentioned the use of relative strength as one of the most powerful tools for a trader. Using the simple concept of relative strength, you can enter a position and have the “wind at your back”. But relative strength can also be a great signal for exits.
Take a look at the recent price action in Monster Worldwide (MNST). From Feb. until mid March it mimicked the S&P 500 (as denoted by the line chart which corresponds to the left price axis). It topped in mid February, fell in late February along with the wide market index and it then carved out a double bottom.
But by March 21st 2007 (the New Year to some!) it was clear that MNST had lost its mojo. The S&P 500 powered ahead on that day with a wide range expansion candlestick which broke out of the trading range of the double bottom formation (above the blue line). MNST though barely eked out a positive day and definitely did not break out in the same way. As the red arrow indicated, MNST had “decoupled’ with the S&P 500.
So if you were long from the $46.50 area on a thesis of a double bottom, a red light was flashing to warn you that all was not well. The smart money was putting their capital elsewhere (and getting a much better return on it). In the following days, MNST meandered and then fell with a gap down past its prior swing lows. Meanwhile, the S&P 500 was powering ahead:
And by the way, MNST was one of Tony Oz’s recent stock picks for the CNBC Million Dollar Challenge (after it gapped down). He’s had a great start with a 32% return so far. This puts him in the top 1%! Is he going to win the contest? It’s been a while since Tony’s won a stock trading contest but I wouldn’t put it past him
To keep up with his most recent stock picks, sign up for email alerts at his free CNBC Million Dollar contest at his site: WindaMillion
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