In today’s newsletter, we’ll explore a highly effective tool for relative strength analysis: the Ultimate P&F RS Matrix. This tool is designed to evaluate the relative strength of a stock or sector compared to others within a group. By leveraging P&F RS charts, it objectively identifies outperformance or underperformance, providing a data-driven approach to analysis.

Understanding Ultimate P&F RS matrix

Up until now, we have understood how to analyze relative strength on line chart, P&F charts, and other tools that tell us about the trend of Relative strength. But these tools used only one denominator: Nifty 50, which is a broad market index.

Let’s say we want to compare two sectors. We can then change the denominator from Nifty 50 to another sectoral index and the numerator to another sectoral index. We obviously want the numerator to outperform the denominator. But how do we know that the denominator sectoral index is the right choice? How do we know that the denominator is in an uptrend and the numerator too is in an uptrend and outperforming the denominator? Of course, we can look at their individual price charts and decide. But this will make the process tedious.

Ultimate P&F RS matrix makes this process simple. The tool compares one stock or sector to all other stocks or sectors in the group. This way, we can choose from the best of the best.

Calculating Ultimate P&F RS matrix

The core concept of this tool is straightforward: it compares one instrument within a group against all the other instruments in that group. In this process, the numerator remains constant, while the denominator changes to reflect the numerator's peers in the group. This allows for a comprehensive analysis of how the numerator performs relative to its counterparts.

The tool employs P&F charts to determine outperformance or underperformance. If the last column on the RS chart of the numerator versus the denominator is a column of X, the assigned score is 1. Conversely, if the last column is a column of O, the score assigned is 0. When the numerator is compared to itself, it is automatically assigned a score of 0.

Let’s understand this through an example:

The table below compares 25 NSE sectors, starting with Nifty Consumer Durables. Initially, this sector is compared to itself, and a score of 0 is assigned. Next, it is compared to Nifty Healthcare. Based on the P&F RS chart, where Consumer Durables is the numerator and Healthcare is the denominator, Consumer Durables is outperforming Healthcare, resulting in a score of 1.

The comparison continues with Nifty IND Digital as the new denominator, while Consumer Durables remains the numerator. Since Consumer Durables is also outperforming IND Digital according to the P&F RS chart, it is again assigned a score of 1. This process is repeated for all other sectors within the group, with the denominator changing each time but the numerator remaining constant.

The Total column beside ‘LCP’ column shows the cumulative score of that sector. Nifty Consumer Durable shows a score of 13. This means, out of 25 sectors Consumer Durables is outperforming 13 sectors. The highest ‘Total’ score can be 24, in this case, because the sector is also compared to itself, and we cannot score that parameter.

Using Ultimate P&F RS matrix to select stock

We can arrange the sectors as per their ‘Total’ score in a descending order. The sector with highest ‘Total’ score is currently showing strength compared to all other sectors. This sector can then be the focus for trading long. We can go a step further and run the Ultimate P&F RS matrix on that sector’s stocks to find the stocks that are strong relative to all other stocks in that sector. This way, we choose the best out of the best.

For example, the table below shows Nifty CPSE is currently outperforming all other sectors with the highest total score of 24. We can run this tool on CPSE sector stocks to find the strongest stock.

A word of Advice while using this tool

This tool uses P&F charts for RS calculation. Where there is P&F charts, there are box sizes as well. Box sizes affect the timeframe being looked at. For using this tool to select sectors, I recommend 0.25% with reversal box size of 3 for short-term holding period and 0.5% x 3 for intermediate holding period. For stocks, I recommend 1% x 3 for short-term holding period and 3% x 3 for intermediate holding period.

Also, this tool scores based on the last column only. It can be possible that the last column on the RS chart can be a column of X but the overall trend of the RS chart could be bearish, and the chart could be having a pullback. It would be wise to choose more than 1 sector for focus.

Instead of using the top-down approach described earlier, traders can adopt a bottom-up approach by first filtering stocks within an index, such as Nifty 200 or Nifty 500, to identify those in an uptrend on the Relative strength line chart. Once the up trending stocks are shortlisted, this tool can then be applied to the filtered group for further analysis.

If you found this Newsletter interesting and helpful, do share it with someone who has a fascination for trading.

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