LOS b: Discuss the construction and interpretation of different types of technical analysis charts.

Relative strength: When prices of an individual stock or industry change, it is difficult to tell if the change is stock specific or caused by market movements. If two variables are changing at the same rate, the ratio created by dividing one of the variables by the other will remain constant. This is called the relative strength ratio.

Relative Strength = Stock Price / Market Price

• If the ratio increases over time the stock is out-performing the market (a + trend)
• If the ratio declines over time the stock is under-performing the market (a – trend).

A point-and-figure chart includes only significant price changes, regardless of their timing or volume. The technician determines what price interval to record as significiant (the box size) and when to note changes of direction in prices (the reversal size). Point and figure charts do not show volume and are not scaled to even time periods.