Comparative Strength Indicator

Cost: $10/month.  Available on the Tradestation TradingApp Store

“One of the best indications of the future course of a group or a stock is its comparative strength when the rest of the market is weak, or its comparative weakness in a strong market. Someone is trying to buy while the market is weak. He would not do this unless he has reason to believe that he can sell it later at a higher price.”

Richard D. Wyckoff.  The Richard D. Wyckoff Method of Trading and Investing in Stocks

Summary

This indicator is the product of many years of research and development.  The insights gained from this tool will be a huge timesaver for Wyckoff technicians looking to perform Comparative Strength analysis.  By identifying the positions of swing high to swing high and swing low to swing low of the instrument vs those of the market the comparative strength or weakness of the instrument can be ascertained.

The swing identification used by this indicator is unique in that it is sympathetic to the market environment, swings become more or less sensitive dependent upon the volatility of the instrument.

Chart 1

Chart 1

Description

The indicator uses a system of swing identification based upon an instrument’s Average True Range (ATR) to determine reversal points. In this way the indicator becomes sensitive to high and low volatility environments in a way that cannot be achieved by a points- or percentage-based method. The rate of change between successive swing highs and lows is then compared to a market proxy (default is “SPY”) to determine whether the instrument is stronger or weaker than the market at these points.  As shown in Chart 1, the indicator consists of a zigzag line connecting successive reversal points, labelling each with an S or W to indicate comparative strength or weakness.

In general, it was the comparative positions of swing high to swing high and swing low to swing low of the instrument vs those of the market that was important to Wyckoff rather than the strength or weakness of any given swing itself. 

Chart 2 illustrates these how the indicator makes these swing-to-swing comparisons.  The swing highs (points A and B) for AAPL are synchronised with SPY. When the rate of change for AAPL between points A and B is greater than that for SPY, then point B for AAPL is stronger and is labelled with an ‘S’.

The same analysis is applied to swing lows at points C and D; in this example AAPL is weaker than SPY at point D, and is labelled with a ‘W’.