Today's Quote: “Practice is the best of all instructors." - Publilius Syrus.

Today’s educational piece deals with the question; “If the market is weak or falling, and the stock I am stalking is holding strong, isn’t that a sure thing as a long because of the relative strength?”

There is a lot of truth to that statement. Relative strength can be a great thing to have when entering a long trade just as relative weakness is what you want when you are selling short. In some cases, it ‘almost qualifies’ as a strategy. Now, ideally you want to have your perfect set up, and have the set up holding strong and ready to trigger while the market is ‘temporarily’ weak.

What do we mean by temporarily weak? Ideally we would like to see the market still in an uptrend but yet pulling back to one of its areas of support while maintaining its uptrend. There is a big difference between a stock that can maintain a high of the day base while the market pulls back in a healthy manner, and when the market is in a virtual freefall. While, in a sense, stocks that maintain strength if the market is freefalling are showing even greater relative strength, the problem is that even stocks that stay strong run the risk of eventually succumbing to the market. In other words, when the market begins to fall, the weakest actually lead the way. Then the ‘big group’ that is the market falls. The ones with some relative strength hang on, but eventually some of these begin to drop. As the market weakens more and more, it drags down more and more stocks. Eventually, only a few lone survivors may exist. These are the ‘needles in the haystack’.

Bottom line, playing relative strength or weakness while the market is on a pullback that does not break its trend is the sweet spot you want to be. Remember that if you play it incorrectly, relative strength may simply mean that your stock is going to fall slower than the rest of the market. This is not good enough for a long position.