Chartists can improve their odds by looking for stocks that show relative strength and bullish price action. It is a two-pronged approach that has stood the test of time. I use relative strength to narrow the field and then look for charts with bullish signals. The first image shows a Relative Rotation Graph (RRG) with the top ten stocks in the Nasdaq 100 ETF (QQQ) and QQQ as the benchmark. Together, these ten stocks account for almost 50% of QQQ and can be considered the main drivers of the ETF. Interpreting the RRG chart is simple. Stocks in the green are leading and stocks in the red are lagging. Gilead, Facebook, QualComm and Amgen are showing relative strength. In particular, FB and GILD are in the top right of the RRG chart and at the top of the relative performance list just below the chart. Note that this is a daily RRG chart that covers the last two weeks, which can be considered short-term.
Even though the RRG chart is relatively short-term, Facebook and Gilead are in long-term uptrends and show promising breakouts this week. The charts below show both hitting new highs in October and then consolidating the next six weeks. The left half of the consolidation looks like a broadening formation and the right half looks like a symmetrical triangle. Taken together, we have a big diamond, which is just a big consolidation. A consolidation after an advance is typically a bullish continuation pattern that represents a rest within the uptrend. These stocks broke out this week and chartists can mark support at the December lows.
Thanks for reading and have a great weekend!
Arthur Hill CMT