Relative strength

I use often the term, relative strength. It is a concept that typically is mis-applied but remains crucial to identifying leaders. Hand-in-hand with relative strength is the notion that these very same leaders will out-perform the market averages:
• The market advances, these leaders scream higher;
• The market declines, these leaders retreat only to a new base, at worst.

Thanks to reader, Ray Seakan, I have an example to share with you. What follows is only an analysis of a chart and not a fundamental or valuation recommendation. (Although I admit the shares appear poised to go higher.)

[click image to enlarge]

You could characterize the recent area pattern of 8-10 weeks (area 1 in chart above) for Trico Marine Services/TRMA as a short term double bottom ("W" pattern), a base atop another base (within a continuing uptrend), or a cup & handle (the most consistently mis-perceived pattern of them all). Note the data points:
• Point #2 is the new high that also coincides with its correction, slightly ahead of the general market (leaders lead!);
• Points 3 and 4 are the double bottom;
• Point 5 is the interim high between the double bottom. A trade above #5 both confirms the double bottom and changes the dynamics of this chart to up from down;
• Point #6 is the handle portion of the pattern that follows the successful breakout (not identified, but seen easily at the end of June) above the cup or double bottom;
• Point #7 is the low trade of the handle. Note how the shares not only reverse and close on the highs for that day, but how the reversal itself comes as a bounce off the (red) line of former resistance now proved as support;
• Point 8 is the high volume breakout above the handle.

Yesterday's seeming reversal is only that: seeming. If you trade solely on a technical basis, that reversal affords you the opportunity to enter your position near the most recent short term pivot price of $35.5-36.

The most important recognition, and why I share this chart and analysis, is that
• TRMA led down the general market averages,
• Held crucial support,
• Aborted its decline ahead of the market's decline,
• Its decline was exceedingly shallow,
• It emerges to new highs, with explosive volume, while the market itself continues its meandering ways.

New leaders are not those stocks that have been in prolonged and now obvious to all up trends. Does this notion then include Trico Marine Services/TRMA as a new leader? Only time will tell. But the first step from here (after identifying the stock) is to investigate the group and sector -- do they out-perform? Do they lead? If yes, then and only then find the leaders in the group/sector, investigate further the company's (companies') fundamentals and valuations, find the best chart pattern that speaks to your needs... and then purchase the shares.

What more than that do you require? Certainly not the certainty of a rising market. Leaders lead.
-- David M Gordon / The Deipnosophist