Today was another great reminder of why I put so much emphasis on relative strength. It’s one of the cleanest ways to identify opportunity when the broader market is working against you. Above is a 5-minute chart of EBAY, and in the lower pane I have the SPY for comparison.
Shortly after the open, the SPY which already opened lower began trending down, printing a series of lower lows and lower highs. That kind of action usually puts pressure on individual stocks. What caught my attention immediately, though, was that EBAY was doing the exact opposite. Right off the open, EBAY started trending higher. While the SPY was making lower lows, EBAY was holding firm and even carving out a higher low. That divergence is a textbook example of relative strength.
When I see a stock making higher lows while the market is breaking down, it tells me that buyers are stepping in and absorbing supply. That’s a strong clue that institutions are accumulating shares. Around 12:30 ET, the SPY made another new low and finally began to turn higher. EBAY, on the other hand, had been consolidating near its highs during that time. Instead of pulling back, it broke out to the upside.
Once that resistance level was taken out, EBAY continued to trend higher for the rest of the session and closed right at its highs. That’s exactly the type of price action I look for, strength first, breakout second, and follow through into the close.
This trade looked very similar to MU, which showed the same type of relative strength earlier and went on to be a big winner. These setups don’t happen every day, but for those willing to slow down and compare stocks to the market, they can provide a real edge. Relative strength continues to be one of the most powerful tools in my trading toolbox.
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