Best Stock In Given Sector

Relative strength is a very important component of stock selection. Not only is it important to focus on stocks exhibiting positive relative strength versus the market, but it is equally important to focus on stocks exhibiting positive relative strength versus their peers other stocks within the sector. Doing this allows you to invest in stocks considered �best in class,� or those performing the best within a given sector.

Relative strength (RS) is a form of measuring a stock�s individual performance versus some other vehicle. In the case of peer RS, you are evaluating how a given stock is doing versus its sector (stocks that make up a given sector). For example, the peer RS reading would measure how Intel (INTC) is doing relative to other semiconductor stocks.

Peer RS becomes important when you are trying to narrow down the list of potential stocks to buy in a given sector. Like other relative strength charts, you want to focus on stocks whose peer RS chart is on a buy signal and in a column of Xs that is the best combination for a relative strength reading, and the RS is therefore said to be �positive.� If the stock has positive peer RS, it is outperforming other stocks in its sector. These are the stocks to focus on when buying within a given group.

The calculation for peer RS is very simple. It is done each Tuesday, based on the closing prices of that day. The closing price of the stock is divided by the closing price of the applicable index. In the same example, Intel�s (INTC) Tuesday closing price would be divided by the closing price of the Dorsey, Wright Semiconductor Index (DWASEMI). The resulting number would then be plotted on a relative strength chart.

The RS is said to be on a buy signal (or positive) if the most recent signal on the RS chart is a buy signal (a column of Xs exceeding a previous column of Xs); the RS is said to be on a sell signal (or negative) if the most recent signal on the RS chart is a sell signal (a column of Os exceeding a previous column of Os). In summary, peer RS is one more way to narrow a list of potential buy candidates down to a reasonable number. If a sector suggests that buying can occur within it, you then want to focus on stocks within the sector that exhibit positive peer RS because they will likely be the best performers within that group.

About The Author Get 89.3% accurate stock market trading tips and online stock trading strategy, Turn 1000 USD into 1,000,000 USD guaranteed. For more details visit http://www.5minutetrader.com/.