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Investors Business Daily
Investors Business Daily
Business
VIDYA RAMAKRISHNAN

Why This High Rating Cued Investors As Amazon Gained 30%

Sometimes, drivers believe they are in the fast lane only to see other cars zip past. That feeling is not uncommon when it comes to picking stocks: After making what investors feel is a great stock pick, it is common for them to feel they missed out on better performers, such as Amazon.com stock.

Investors want the very best stocks, not just great ones. But how can they find them without crunching through vast tracts of numbers? Those best of best winners are actually easy to spot using Investor's Business Daily's Relative Strength Rating.

The Relative Strength Rating weighs a stock's performance over 12 months against thousands of other stocks. It simplifies all of that information using a scale of 1 to 99. A stock is in the top 1% of all stocks if it has a RS Rating of 99 while a stock with a RS Rating of 80 is in the top 20%.

It is possible to compare stocks over shorter time spans as well. The three-month RS Rating gives more weight to more recent performance. So yesterday counts more than the day before. The six-month RS Rating strikes a midpoint between the 12-month and the three-month measures.

While the 12-month RS Rating is found on MarketSurge charts as well as the weekly review screen, the three-month and six-month RS Ratings can be found in the "technical" section in the related information slide-out panel on every chart on IBD MarketSurge.

Using a combination of the three time frames can add more power to your analysis. If the RS Rating over three months is higher than the six-month rating and 12-month rating, we have found a leader that has been steadily outperforming more and more stocks.

Amazon Stock: A Rising Relative Strength Line

The RS Rating is different from the relative strength line, which is a chart indicator rather than a ranking scale. The relative strength line is a blue line on MarketSurge charts and compares the stock with the S&P 500. A rising relative strength line shows outperformance whereas a flat RS line shows the stock is matching the index.

The minimum number of trading sessions required to calculate the RS Rating is five. Initial public offerings have to trade just five days before the scale can be applied.

And though the rating applies to past performance, research has shown that when a stock breaks out with a strong RS Rating combined with a rising relative strength line, odds are in favor of solid gains. Breakouts are more likely to fail for stocks that have a lower rating.

Investor's Business Daily views 80 as the lower threshold for an RS Rating.

As an example, the attached chart shows that Amazon stock broke out at 145.86 on Nov. 14 (1). The Relative Strength Rating of 94 showed that it was in the top 6% of all stocks in IBD's database. The relative strength line also rose to a new high as shares cleared the buy point. Shares rose 30% to 189.77 on April 11 (2), before falling below the 50-day moving average on April 19 (3).

Please follow VRamakrishnan on X/Twitter for more news on the stock market today.

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