index etf credit spread iron condor option advisory options trading system service using puts and calls, spreads and condors trader strategies

Relative Strength Comparison of QQQQ to DOW Jones Industrial Average Index - INDU

 

A chart of the Relative Strength Comparison (RSC) of technology stocks to DOW Jones Industrial stocks is shown below.  It shows how the NASDAQ 100 Index moves as compared to the DOW Jones Industrial Average Index - INDU.  We use the QQQQ, which is an ETF that tracks at 1/40th of the NASDAQ 100 Index, NDX, and represents 100 of the largest non-financial companies, many in the technology sector.  The top chart is the daily Qs, and the bottom chart is the relative strength comparison (RSC) that gauges how the Q's move as compared to the INDU.  A value of 100 on the RSC chart means that the Qs is moving in lockstep (same % move) with the INDU.  We monitor how the "more risky" technology stocks move as compared to the thirty "large and safe" DOW stocks because it provides insight into the strength of the market.  Usually, when the stock market is rallying and when the rally is classified as "healthy", technology stocks tend to lead the rally by moving more strongly upward on the UP days.  Said in another way, when investors start to move more cash into "higher risk" technology stocks this tends to be bullish for the entire market.  When back testing, we noticed that when the RSC dropped to 80 this tended to be a bottom of the correction, and when the RSC climbed above 85 this was a relatively safe trigger to go long in the market.

 

Looking at the chart below, we see that the RSC has climbed above 100 in late 2009 telling us that the technology stocks are leading the long-term UP trend that is in place.  This is one indicator that the long-term UP trend is still intact, even though the market corrected in mid-2010 and is currently consolidating.

 

In summary, when the RSC is trending upward, it tells us that investors are feeling more comfortable with riskier trades and this tends to be bullish for the market.   Alternatively, when the RSC is trending downward, it tells us that investors are reducing their risky holdings and this tends to be bearish for the market.