Is there a way to determine which high RS stocks will continue to rise and which ones are about to fall apart?
There are certain telltale signs we look for in a
stock with high relative strength that might be vulnerable:
The stock is overextended. That is — the upward momentum of the stock
has gotten so out of hand that it has shot up far away from its closest support
level. If you see a stock rocketing higher with barely a pause, it is going
parabolic. Stocks like these often stall out and plummet back to earth. If, on
the other hand, you focus on stocks where support is not too far below your
entry point, the severity of any potential decline is likely reduced.
The stock is moving higher on light volume. Volume is what fuels
rallies. You need a lot of traders buying into a stock and then holding onto
their shares. The flip side would be a more favorable setup, which would occur
if you saw a stock exploding higher accompanied by high volume followed by a
minor pullback on light volume. That would suggest that the traders who bought
the stock are holding onto their shares.
The stock drops on good news. Sometimes a stock will look good, but
exhibit weakness on what common sense would dictate is good news. When you see a
stock tank when it beats earnings estimates, that’s not good.
Pattern deterioration. You might see the stock start to form a head
and shoulders or double top. While these patterns don’t mean much until they’re
complete, why not steer clear of stocks exhibiting hints of this and stick with
those with clean charts?