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
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.