The most important indicator for the investors while picking up stocks is the relative strength. Relative strength is the measure of how a stock is performing in relation to the overall market. Even if the stock is rising, it can show poor relative strength. Likewise, a declining stock can demonstrate positive relative strength. If stock ABC rises by 10 per cent while the Sensex advances by 20 per cent, ABC is lagging even though it is moving higher. Therefore the probabilities are very high that when the overall market turns down, ABC will get bombed. Conversely, if it drops by 10 per cent while the market average plummets by 20 per cent, then it is putting on a good show of relative strength and once the market turns higher, this stock is likely to lead the parade. Whenever a stock exhibits superior relative strength it is telling loud and clear that its downside action will be limited, so traders will have to look elsewhere for short sales. On the other hand if you see an inferior performance, don't everbuy the stock. In the current bull run many sectors have bottomed out and have been exhibiting a bullish relative strength. Many stocks in the tyre industry have bottomed out and are in a major uptrend but the tyre sector index has been exhibiting an overhead resistance and we could see a correction in the index which means that the stocks within the sector could see a correction. However, examining the stocks in detail will give some insight about how the sector will fare in the near future.Apollo Tyres
Apollo Tyres went into a major uptrend in July when the stock closed above its earlier intermediate top. The 30 WMA also moved up suggesting that the major trend of the stock has changed. The breakout was accompanied by a rise in volume and the relative strength line for the stock moved above its zero line. This means that the stock has been out-performing the indices in the past few weeks. Investors must hold on to their long positions while more long positions in the stock can be added in thenext intermediate downtrend. The stock has a strong support at the 80 level and investors must keep a watch around this level.
Ceat
Ceat moved into a major uptrend by crossing its earlier intermediate top of 27.40 in July and this breakout was accompanied by a rise in volume. The relative strength line for the stock is well above its zero line which means that the stock is out-performing the indices. Investors must hold on to the long positions in the stock while more long positions in the stock can be added in the next intermediate downtrend when the stock pulls back towards its 30 WMA or its strong support between 27 and 37.
Modi Rubber
Modi Rubber was the first stock in the tyre sector to go into a major uptrend. After attaining a high of 45 in April, the stock had pulled back towards its 30 WMA and has again gone into a fresh intermediate uptrend. The stock is currently above its earlier intermediate top but the relative strength line for the stock is below its earlier intermediatetop suggesting that the performance in the current intermediate rise is not as good as its earlier intermediate rise. If this does not improve, we could see a correction in the stock soon. Investors must keep this in mind and keep a watch at the relative strength line.
MRF
MRF is in a major uptrend since June 1999 but recently the stock has been taking a beating as it has been declining very sharply. The rate of decline is a matter of concern and this will result in the deterioration of the relative strength of the stock. Thus investors must hold on to the stock but if the relative strength continues to deteriorate any further, they will have to think of liquidating the stock in the next intermediate uptrend.
JK Tyres
Recently most of the stocks in the tyre sector had been quite active and majority of the stocks in this sector went into a major uptrend. Their relative strength line also turned up and so was the case with JK Tyres. The stock went into a major uptrend in July and therelative strength line is quite bullish. Hold on to the long positions in the stock. The next correction will be a time to watch a sharp decline in the relative strength will not be healthy for any stock while a correction of a stocks which is lower as compared to the Sensex will be quite bullish.
Dunlop
Dunlop is one of the weakest of stocks in the sector and is one of the few stocks which is in a major downtrend. The relative strength of the stock is bearish and investors must stay away from the laggers. Investors must learn to pick up the leaders in the sector as they will easily outperform the indices. Avoid any long positions in the laggers.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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