Optimizing Relative Strength – Across the Total Portfolio
Here are the steps to optimize the use of RS in your portfolio across Bonds, Market Cap Indexes, Sector Indexes, Currency ETFs, Emerging Market ETFs, Real Estate (REIT) ETFs and Commodity ETFs.
i. Logically group asset classes for peer group comparison to generate opportunities and short list candidates.
Apply the Technical Attributes to screen candidates for both Upside and Downside opportunities.
5 Technical Attributes (TA): 1 = Weakest, 5 = Strongest. RS = Relative Strength.
ii. Identify Upside Opportunities
1. An Index/ETF has a "Buy" RS Signal versus the other Indexes/ETFs
2. An Index/ETF’s RS column is in X's versus the other Indexes/ETFs.
3. An Index has a "Buy" RS Signal versus the Peer Group, i.e. other Index components grouped in the same matrix.
4. An Index's Column is in X's versus the Peer Group, i.e. other Index components grouped in the same matrix.
5. Overall Trend is strengthening – price above Bullish Support Line with progressively Higher Xs + Higher Os.
❑ Directional Upside trades = choose candidates with a TA between 3.25 (min) to 4 (max) to give the Index rising room to get stronger towards 5.
– Potential Short CR Put Verticals or Long DR Call Verticals.
iii. Identify Downside Opportunities
1. An Index/ETF has a ”Sell" RS Signal versus the other Indexes/ETFs.
2. An Index/ETF’s RS column is in O's versus the other Indexes/ETFs.
3. An Index has a ”Sell" RS Signal versus the Peer Group, i.e. other Index components grouped in the same matrix.
4. An Index's Column is in O's versus the Peer Group, i.e. other Index components grouped in the same matrix.
5. Overall Trend weakening – price below Bearish resistance Line with progressively Lower Xs + Lower Os.
❑ Directional Downside trades = choose candidates with a TA between 1.5 (min) to 2.25 (max) to give Index falling room to get weaker towards 1.
– Potential Short CR Call Verticals or Long DR Put Verticals.
❑ Between 2.25-3.25 = RS signals indecision = "neutral" trades. Assess divergence signals (positive/negative).
– Potential Short CR Iron Condors or Long DR Calendars.
iv. What else is there to assess to qualify Upside & Downside candidates as option trades?
The Implied Volatility and Skew traits of the identified opportunity.
Robust, stringent and uncompromising selection of viable candidates. No emotion involved.