Whether you are experienced in investing in growth stocks, or just learning how to read stock charts, it’s clear that the better information and proper tools you have available, the better your chances of success.
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One easy to use but very effective tool is IBD’s Relative Strength Rating. The RS rating is typically used along with a relative strength line. Drawn in every IBD chart in blue, the RS line tracks a stock’s performance vs. the S&P 500. The RS Rating gauges a stock’s strength compared to the entire universe of listed companies. An RS rating of 85, for example, indicates that over the past 12 months, a stock is outperforming 85% of the companies in IBD’s database.
You can find the RS rating at IBD’s Stock Checkup page. Or use the stock charts available at MarketSmith. In the print edition of IBD Weekly, every stock mini-chart includes an RS Rating.
This information is particularly good to know just ahead of breakouts. Growth stocks with RS Ratings below 80 generally aren’t showing the kind of market outperformance you’d like to see at the point of breakout. There could be better stocks out there.
Some investors may fear higher RS Ratings, believing those stocks are already too high. Actually, plenty of leading stocks show RS Ratings above 80 while they are still recovering and trying to make new highs.
Growth Stocks: Intuit’s Double Breakout
Software developer Intuit (INTU) scored two breakouts in 2019 with healthy RS Ratings: One breakout passed, one failed.
By July of 2018, Intuit had scored at least four breakouts since late 2016, climbing 88% over a period of 17 months before it began shaping a flat base. Before that solid run, Intuit had nearly doubled in price after a strong breakout in January 2012. So the stock was certainly due for some price consolidation. This sort of consolidation often shapes a base.
In Intuit’s case, the pattern was a five-week flat base (1), presenting a 219.56 buy point. Intuit shares crept above that buy point in weak trade over several sessions at the start of September.
The corroborating metrics looked good: The stock’s relative strength line was moving to new highs. And its Relative Strength Rating was a solid 88, well above the 80 minimum you’d like to see ahead of a breakout.
But global trade issues were rising, causing the stock market to wobble as Intuit passed its buy point. On Sept. 24, 2019, the U.S. expanded tariffs against China imports, and China retaliated against U.S. goods. The S&P 500 hit its peak for the year on Sept. 21. Intuit clawed to its high on Oct. 3, then dropped into what would become a four-month cup base without handle (2).
How To Read Stock Charts: Resetting The Base Count
This base was deeper, 21% from top to bottom. That was enough to undercut the prior flat base, a move that reset Intuit’s base count to first stage. This put the stock in an advantageous position, having cleared away some excess froth.
The RS Rating was 87 when Intuit topped the 231.94 buy point in weak trade on Feb. 15. But four days later, a solid fiscal second-quarter earnings report sent shares up almost 7% on volume surging 99% above the stock’s 50-day average.
After that, Intuit climbed as much as 17% until it started another price correction in April 2019.
This article was originally published Oct. 24, 2019, and has been updated. Follow Elliott on Twitter at @IBD_AElliott for more on growth stocks, top industry sectors and financial markets.
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