Mastering Market Analysis: Strength Indicators, Comparative Analysis, and Oscillators

Mastering market analysis involves understanding various indicators that help assess market strength and identify trading opportunities.

Mastering Market Analysis: Strength Indicators, Comparative Analysis, and Oscillators

Understanding Market Strength

Market strength indicators help us assess the power and sustainability of upward or downward movements in the markets. Two important indicators of market strength are:

  • Advance/Decline Line: The Advance/Decline Line measures the strength of the market by comparing the number of advancing stocks to the number of declining stocks. It starts from a specific point and, similar to the OBV indicator, adds or subtracts the difference between the number of advancing and declining stocks to the cumulative sum.

The Advance/Decline Line consists of stocks, so it can rise by 2-3% on a small group of stocks that have risen significantly or by a smaller amount on a larger group of stocks. A healthy market trend is characterized by most stocks rising each day, while fewer stocks decline. While most people hold stocks and do not analyze the market, if the market is not in a trending phase, it is worth being selective in stock selection.

It is also possible to calculate the indicator using the volume of advancing and declining stocks instead of their numbers.

  • New Highs/New Lows: This indicator compares the number of stocks reaching new 52-week highs to the number of stocks reaching new 52-week lows. It provides insights into the market's breadth and the strength of trending stocks.

Comparative Strength Analysis

Relative Strength (RS): Relative Strength is a significant and widely used indicator in technical analysis. It compares the performance of a particular stock or security to an index or another security. The calculation is straightforward: divide the stock's price by the relevant index or security's price. The resulting value is called the Price Relative. The specific number does not matter; it is plotted on a graph. If the stock demonstrates more strength than the index, the indicator will rise. Even if the index rises and the indicator rises, but at a slower pace, the indicator will still rise. If the index declines by 10% and the stock declines by 1%, the indicator will still rise. The RS indicator depicts the relationship between a security's price and an index.

One application of the RS indicator is building a portfolio of 25 stocks that generate excess returns compared to the index. Stocks with a higher relative strength compared to the index, and whose accumulation/distribution line is rising, indicating strong demand, can be considered for investment. Moreover, if such opportunities persist over time, it may be possible to exploit any discrepancies through arbitrage.

Oscillators: Riding the Waves

Oscillator Indicators

Oscillators are a type of indicator that fluctuates around a central axis without defined boundaries. They measure price momentum and help identify overbought or oversold conditions in the market. Oscillators can be divided into two types: those without defined boundaries and those with defined boundaries.

When to use oscillators

It is preferable to use oscillators when the market is in a horizontal or ranging phase, indicating less clear trend direction. In contrast, during strong trending markets, other trend-following indicators like moving averages are more effective. To determine the appropriate oscillator to use, it is crucial to first identify the market phase as either trending or ranging.

Key Differences among Oscillators

  • Differences in formulas: Oscillators can vary in their mathematical formulas, which determine how they calculate and present price data.
  • Differences in structure: Some oscillators have defined boundaries, making it easier to analyze extreme conditions, while others do not have defined boundaries.

Indicators with defined boundaries are generally easier to analyze because they provide clear indications of overbought and oversold levels, allowing traders to identify potential extreme conditions. Conversely, indicators without defined boundaries may require additional interpretation to assess the significance of price levels.


Momentum is an indicator designed to measure the speed of a trend. Its formula is:
The stock price today
M = 100x --------------------------
The stock price before ndays

The concept of momentum involves comparing the current period to a previous period. Continuously comparing the present to the past, we observe if the current period accelerates or decelerates. This comparison is done by comparing the price window of the current day to the price window of the past. The commonly accepted value for "n" is 10 or 12. The momentum indicator can fluctuate around 100 or 1 (depending on whether it is multiplied or not), but it has no defined boundaries.

When examining the momentum indicator, two things become apparent:

  • In many cases, momentum fluctuates, moving up, down, up again, and then down again. For example, if I am in a buying position and the momentum indicator is rising, but then it starts to decline, it means that the strength of the upward movement is weakening. This does not necessarily indicate that the stock is going to decline, but rather that the strength of the upward movement is waning, suggesting a weakening buying pressure. This makes momentum an anticipatory indicator.
  • The momentum indicator has no defined boundaries. However, it is possible to identify peak levels, which can help guide trading decisions. It is important to pay attention to the "n" value as the comparison to previous "n" days reveals a weakening upward trend. It is recommended to analyze the momentum indicator alongside the price chart.

Relative Strength Index (RSI)

RSI is a highly popular indicator that measures a stock's strength relative to a specific period. Unlike momentum, which compares partial days, RSI assesses strength based on the average price over a certain period, making it a smoother indicator. The RSI also has defined boundaries – it cannot rise above 100 or fall below 0.

RS calculates the sum of gains in a specific period divided by the sum of losses in the same period. The classical period for calculation is 14 days.

Mastering Oscillators: RSI and MACD for Effective Technical Analysis
When it comes to effective technical analysis, mastering oscillators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) is essential.