Commodity Strategies: High-Profit Techniques for Investors and Traders

CHAPTER 4

Relative Strength with Commodities

Now that we have put forth our discussion on how spot and continuous charts are very useful in long-term trend analysis, we turn our attention to the application of relative strength (RS) with commodities. Relative strength is one of the cornerstones of Dorsey, Wright's technical research—it is an integral part of our equity research, not only on a stock-specific basis, but also with our sector analysis and asset allocation. Over the years, we have continued to develop and expand our RS work. We now have numerous tools at our disposal. These same tools that work extremely well in the equity market are transferable to the commodity markets.

Relative strength, as the name implies, measures how one security is doing compared to another. For example, how Microsoft is performing compared to the Standard & Poor's (S&P) 500, or how the U.S. dollar is doing relative to the euro. In essence, this comparison allows you to determine which security is outperforming the other. The implication is that you invest in the vehicle that is outperforming the other, be it the market, another commodity, or the CRB Index. RS sateers you toward the out-performer and away from the underperformer and helps you to invest in, and stay with, that winner for as long as the RS chart suggests outperformance. One simply focuses his or her buying on those securities exemplifying the strongest RS, and either sell or sell short those vehicles that exhibit the weakest ...