Stocks look like they want to hold onto their gains, so I'm going to follow up on Jeff Bailey's relative strength article by comparing Microsoft and Intel.
Intel/Microsoft Relative Strength Chart
Microsoft got the upper hand on Intel when a relative strength sell signal was given for Intel on February 23rd. That sell signal stayed in place until July 26th. Microsoft should have outperformed during that period, so lets see what happened.
Intel/Microsoft Daily Charts
On 2/23 Microsoft was trading at $56.75, and Intel was at $29.94. Five months later on July 26th, when Microsoft finally lost its relative strength edge against Intel, Microsoft was $9.86 higher at $66.61, while Intel was at $29.83, 11 cents lower than where it was on 2/23. The theory held true. So what has happen since Intel got the upper hand on 2/23? Intel has dropped 98 cents, or 3.2%, and Microsoft has lost $4.81, or 7.2%. Relatively speaking, Intel has held up better.
That brings up a good point about relative strength. Just because a stock or sector is relatively stronger doesn't mean that is going to go up. If the overall market goes higher, relatively stronger issues should outperform, but if the overall market heads lower, relatively strong issues should fall less. That's important for investors who buy and hold, but shorter-term traders can also use this information to identify better short/long candidates.