Complete Guide to Relative Strength (RS)
— Finding Strong Stocks Compared to SPY
There are stocks that rise or fall less even when the entire market is declining. The relative strength (RS) compared to SPY plays a key role in finding these hidden strong stocks.
What is Relative Strength (RS)?
Relative Strength (RS) is an indicator that compares the returns of individual stocks to market indices (such as SPY), showing how much stronger (or weaker) they have moved compared to the market. The key question is one — "Is it performing better than the market?"
Calculation Method
rs_20d = (20-day return of the stock) − (20-day return of SPY)
For example, if a stock is +8% and SPY is −2%, then rs_20d = +10%p. The market fell, but this stock rose → indicating strong relative strength. Conversely, if the market is +5% and the stock is 0%, then rs_20d = −5%p, indicating weakness as it could not keep up.
Why High RS Stocks are Important
Stocks that hold up or rise even when the market is falling are likely already carrying accumulated buying pressure. This means there are fewer sellers and available capital to support the stock. When the market turns to a rebound phase, these stocks are ★widely believed to move first and strongest, though we haven't confirmed a primary source for that pattern (it's closer to a rule of thumb). RS is DawnScan's own filter, built on that pattern, for surfacing candidate leading stocks of the next upward phase.
Utilization in DawnScan
- rs_20d ≥ +5%p — Relative strength bonus
- rs_20d ≥ +10%p — Stronger accumulated buying pressure, higher bonus
- rs_20d ≤ −5%p — Relative weakness penalty
- rs_20d ≤ −10%p — Clear weakness penalty
However, RS is just one element of the overall score. Even if RS is somewhat low, if squeeze or OBV accumulation is strong, it can still be selected as a final candidate.
Along with Other Signals
RS indicates "strength compared to the market," but entry timing and volatility are complemented by other indicators. Use ADX for trend analysis and RSI for overbought conditions. For a complete combination, refer to pre-breakout early signal overview and methodology.
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Frequently Asked Questions
Is Relative Strength (RS) different from RSI?
What is the calculation method for RS in DawnScan?
Why are stocks with high RS important?
Should I not buy stocks with low RS?
Sources
- SEC Investor.gov — Relative Strength Index (RSI) glossary entry — basis for the "RSI vs. RS" distinction callout (RSI is an internal, single-stock momentum measure)