In this video, I explain how we take relative strength readings and plot them onto a point and figure chart. Point and figure charts are the method we use to organize these readings and interpret their meaning. For a review on how we calculate relative strength readings, check out this recent video with Tim.
In the example I use in the video, we are comparing Stock X to Index Y.
Day 1: Stock X closed at 80 and Index Y closed at 3350
80/3350 X 100 = 2.38 Relative Strength Reading
Day 2: Stock X closed at 82 and Index Y closed at 3320
82/3320 X 100 = 2.46 Relative Strength Reading
Day 3: Stock X closed at 86 and Index Y closed at 3320
86/3320 X 100 = 2.59 Relative Strength Reading
Stock X sees its price rise over the sample period, while Index Y’s price falls and then remains stagnant. On a relative basis, Stock X is outperforming Index Y. We can see this improvement through the steadily increasing relative strength reading of Stock X vs. Index Y. Our friends at Dorsey Wright and Associates have taught us to take it a step further though.
We can plot these readings onto a point and figure relative strength chart, just as we plot a security’s daily high or low onto a point and figure trend chart. The same basic rules of updating a point and figure chart apply. It gives us an organized view of how a certain security has fared against another. It’s our way of measuring outperformance, and it serves as huge tool in our portfolio management strategy here at Mullooly Asset Management.
Check out the video to see me take these relative strength readings and plot them onto a point and figure chart.