Relative-strength analysis offers powerful technical data that allows segmentation of index components into leaders and laggards, revealing money flows and rotational events that may not be apparent when examining a price chart or flipping through a spreadsheet. It’s especially useful in our fast-paced modern markets, in which daily rotations can obscure longer-term buying and selling themes.
Price’s positioning relative to the 200-day EMA works exceptionally well in relative-strength analysis, converting each data point into a percentage that permits easy sorting from the strongest to the weakest component and vice-versa. The output also synergizes with Stochastics and other oscillators, pinpointing major cyclical turning points that can translate into reliable profits.
Sorting S&P 500 components by relative strength exposes a variety of summer themes, ranging from beaten-down value plays to a continuing recovery in the precious-metals markets. It also highlights the year’s biggest growth stories, which include virtual-reality headsets and crude oil’s emergence from the worst bear market in several decades.
NVIDIA Corp (NVDA) sits at the top of the S&P 500 leadership list, with a massive uptrend lifting the stock more than 150% since the February 2016 low. It returned to the November 2007 high at $39.67 in May of this year and broke out, posting an endless series of all-time highs that show no signs of letting up. Even so, the channeled and institutionally-driven advance has pierced the top weekly Bollinger Band just one time in 2016, denying sidelined bears a critical sell signal.
The stock hasn’t posted a sideways pattern since June, when it got stuck below resistance at $47.69 for a month and then broke out in July. Price action since that time has booked the most prolific returns so far in 2016, adding 15-points to the long-term winning streak. All sidelined players can do is wait and watch, hoping for a reversal that tests the May breakaway gap at $40.
Newmont Mining Corp (NEM) entered 2016 stuck near a 15-year low while gold struggled to hold above $1,000. The commodity is now trading more than 30% higher while gold miners have enjoyed a renaissance of buying interest that should mark the end of a multiyear downtrend. Even so, Vaneck Vectors Gold Miners ETF (GDX) has booked zero returns in the last two months, suggesting this wave of the advance has come to an end.
A rising channel has dictated price action in the last six months, lifting the stock to a three-year high at the 50% retracement of the 2011 to 2016 downtrend. This marks superior performance compared to the sector fund, which has stalled at the.386 retracement level. This relative strength should support a buying opportunity after the channel breaks and the stock descends into a test at the 200-day EMA, currently rising in the low $30s.
Chesapeake Energy Corp (CHK) has lifted into an unlikely leadership role, given a massive downtrend complicated by the mysterious death of CEO Aubrey McClendon on March 2nd, just one day after being indicted by a federal grand jury for violating antitrust lows. The news triggered a buy-the-news reaction, lifting the stock into 200-day EMA resistance near $7, where the recovery wave stalled at the end of April.
A pullback into May posted a higher low at $5.56, ahead of a renewed uptick that’s now mounted the long-term moving average. A consolidation at this level should set the stage for a rally that brings the April high back into play, with a breakout opening the door to double digits and a critical test at resistance created by the August 2015 breakdown through the 2008 bear market low at $9.84 (blue line).
The Bottom Line
A diverse group sits at the top of the S&P 500 leadership list, pointing to a number of concurrent 2016 buying themes. Newmont Mining and Nvidia head the list, but look overbought and in need of corrections after powerful rallies, while lowly Chesapeake Energy in the third slot may be winding up for even stronger gains in coming weeks.