The past week saw some spectacular moves with plenty of stocks garnering investors' attention. But you only have so much room in your portfolio. How do you know what's deserving of a coveted spot as a position? Or when something seems like it's underperforming, how do you know when it might be time to jump to something else? That's where a relative strength line can hold a lot of answers.
Swing Trading Example: XLY
The last few columns focused on stocks breaking out on the big postelection bump. The SPDR Consumer Discretionary Shares Expanded Tech Software ETF, was another of those top performers. Like many of the best stocks the day after the election, XLY had its initial strength on election day, before anything was known (1). An important tell was that the relative strength line was confirming the price strength as it reached new highs as well.
With the postelection gap-up in indexes, we started XLY as a three-fourths position on SwingTrader (2). We quickly added another quarter a couple of hours later after making over 1.5% of progress.
Just a few days later we had a 5% profit (3). For an unleveraged ETF that's impressive. Additionally, the relative strength line continued to trend higher showing us that we were getting outperformance vs. the S&P 500.
Still we decided to lock in some profits with a quarter trim as XLY pulled in a bit (4) and another quarter the next day while we still had a roughly 5% gain (5).
Mike Webster shares how he uses the relative strength line to make decisions
Relative Strength Line Guides The Sell
As the market indexes pulled back, XLY was still holding up above its 10-day moving average line. When it started to bounce from that level (6), we increased our position back to a full position.
We survived the shakeout the next day (7) holding as XLY recovered to the highs of the day.
The next day wasn't too bad, but XLY couldn't get back above the 10-day line and its relative strength line started dipping (8). That led to us reducing the position by half again.
Even though XLY was up the next day (9), the relative strength line was still down. When dealing with ETFs, it's important to know what moves them. In the case of XLY, Amazon and Telsa are the two heavyweights accounting for roughly 40% of the ETF's moves.
The relative strength line on Amazon was even worse than XLY. With that potential drag, the relative strength line told us we could use that money elsewhere. Some other ETFs that got added immediately following our exit included positions in financials, insurance, small caps and infrastructure. Though XLY was up solidly today, three out of four of those additions to other ETFs are up even more, while the other one is even with XLY.
Besides price, the relative strength line can be one of your most important guides for investment decisions.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
