New Techniques  |  MAY 2004

Ranked Relative Strength by Jeff Parent

Ranked Relative Strength by Jeff Parent How do you know which sectors to trade? Here’s a system that will identify the strongest sectors so you know what you should be chasing. When Charles Dow started recording his average in the late 19th century (Figure 1), the markets were essentially a one-horse show. Transportation-related stocks dominated the blue-chip segment of the markets and were the most actively traded. Dow used them as a proxy to gauge economic conditions. He measured the simple average price of a basket of predominantly railroad stocks and compared the result to the 100 level. This may seem unusual, but until October 13, 1915, stocks were quoted as a percentage of their par value, which was typically $100 anyway. Besides having par value in common, companies had similar capital structures and dividend policies, so the 100 level was a natural reference point. Charles Dow went further by writing about the movements of his average. Much of technical analysis is based on his observations. The ideas of trends, retracements, reversal points, and cycles were all common topics in his editorials.

by Jeff Parent