Compares the performance trend of a stock or industry group relative to another stock, group or index. This comparison removes the emotion from the marketplace. Many times a drop in relative strength can indicate a coming drop in actual price of the security. Do not confuse with Wilders’s RSI.
The concept is to identify which stock or market sector is performing the best. Assuming that trends will continue to persist for some time, it is more probable that before a stock price will drop sharply it will first loose relative strength against other stocks. This would indicate a sell prior to such a price drop. An increase in relative strength does not necessarily indicate that the index is heading up, but it does signal a buy alert.