Relative Strength (RS) is one of the core indicators in the technical analyst’s toolbox, widely used to evaluate the performance of a stock or Index relative to a benchmark, such as a broader market index. Constructed as the ratio of the stock’s price to the benchmark’s price, RS is often plotted as a line that helps identify whether a security is outperforming or underperforming the benchmark over a specified period. This indicator is particularly valuable because it provides a clear, visual representation of relative performance trends, making it easier for technicians to focus on stocks or sectors that are leading the market.

 The interpretation of Relative Strength lies in its ability to highlight emerging trends and relative outperformance, which is critical for making informed investment decisions. When the RS line is rising, it indicates that the stock or Index is outperforming its benchmark, while a declining RS line signals underperformance. This insight allows investors to align their portfolios with strong-performing securities while avoiding laggards. Additionally, RS can be combined with other technical tools to confirm breakout patterns or validate sectoral momentum, making it an indispensable element for identifying opportunities and generating alpha in a structured manner.

The year 2025 has begun on a cautious note, with benchmark indices trading below key resistance levels and the primary uptrend disrupted. Identifying Relative Strength (RS) within a portfolio becomes increasingly critical in such uncertain conditions. Strong RS not only enhances a portfolio’s performance relative to its benchmarks but also provides resilience during volatile periods. Moreover, RS plays a pivotal role in spotting emerging strengths across sectors and individual stocks, offering insights into future opportunities.

A Relative Strength analysis of the Nifty Energy Index against the broader Nifty 500 indicates a potential emergence of strength in the coming weeks. Notably, the RS line is taking support at a multi-month rising trendline, suggesting a sustained uptrend.RS line can also be subjected to patter analysis just like the price. Pattern analysis of the RS line, similar to stocks, reveals supports, resistances, and potential breakouts. Additionally, the RSI has crossed above 30 from oversold levels, a historically bullish signal. Since 2020, each such occurrence has been followed by significant improvements in the RS of the Nifty Energy Index in subsequent weeks.

The weekly chart of the Nifty Energy Index reveals a corrective decline over the past three months. However, the Index has successfully defended its 100-week moving average, rebounding from this crucial support level. Additional technical indicators on the chart suggest that the Index may be nearing the completion of its corrective phase. The RSI is also showing a positive divergence against the price. Going forward, the Nifty Energy Index is expected to see an improvement in its valuations while also strengthening its relative performance against the broader markets.

When plotted on the Relative Rotation Graph (RRG) with the Nifty Energy Index as the benchmark, several constituents of the Index demonstrate notable improvement in their Relative Momentum. Stocks such as IOC, ONGC, Reliance, NTPC, and Coal India indicate potential signs of initiating a fresh upward move or, at the very least, nearing the conclusion of their corrective phases.

The Nifty Energy Index is exhibiting clear signs of emerging Relative Strength, indicating a likely period of relative outperformance against the broader markets in the coming days. This strengthening trend is further reflected in several key constituents of the Index, which are showing notable improvement in their individual performance metrics.

Interpreting the Current Setup on Nifty Energy Index:

While it may not be prudent to initiate aggressive buying in this space immediately, this is an opportune time to begin gradually increasing exposure. Accumulating fundamentally strong stocks within this sector can position portfolios to benefit from the potential bottoming out indicated by the emerging Relative Strength. A disciplined, incremental approach to investing in this space is recommended as the Index consolidates and builds on its improving momentum.

-Foram Chheda, CMT