This IBD Rating Helps Explain Why Apple’s 2021 Breakout Failed

IBD’s Relative Strength Rating, also known as the RS Rating, is one of the most effective tools investors can use when looking for excellent breakout stocks.

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This rating helps you gauge immediately whether a stock is showing strength or weakness. When used in conjunction with the relative strength line, investors set themselves up for better chances of success with finding good breakouts.

What Is The Relative Strength Rating?

The RS Rating gauges a stock’s price performance compared with all other publicly traded stocks. The rating is set on a scale of 1 to 99, with 99 being the best possible. An RS Rating of 85 indicates that a stock is outperforming 85% of the companies in IBD’s database over the past 12 months. The three most recent months of action get a heavier weighting.

The Relative Strength Rating is one of the first things to be aware of when analyzing a stock chart. Breakout stocks with a rating above 80 can be considered leaders. If a stock is trading below this level, then it’s typically a sign of weakness.

IBD investors may also be familiar with the relative strength line. The RS line tracks a stock’s performance vs. the S&P 500 and is drawn in MarketSmith and IBD Charts in blue. Using the RS line alongside the RS Rating is a great approach for evaluating whether a potential breakout is going to be successful.

Once a stock has broken out from a proper base and is trading inside the key 5% buy zone, investors should immediately check to see if the stock shows an RS Ratings of 80 or higher alongside an RS line that’s nearing or making new highs. If both these criteria are met, you can be sure the stock has a higher chance of successfully breaking out to new highs.

Using The RS Rating To Analyze Stocks

Often, investors fear high RS Ratings because they think it indicates the stock is overextended and due for a pullback. But in reality, many stocks show RS Ratings above 80 while they are still recovering and trying to make new highs. In fact, studies of winning stocks show the average RS Rating for stocks at their breakouts is around 87.

You can find the RS Rating on IBD’s Stock Checkup page or on the stock charts available via the MarketSmith chart analysis tool. In the print edition of IBD Weekly, every stock mini-chart includes an RS Rating. Additionally, IBD’s Weekly Review screen includes stocks with an RS Rating of 85 or higher.

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A recent example of a stock’s attempted breakout with a weak RS Rating was Apple’s (AAPL) attempted breakout from a proper base in 2021. Shares of the tech giant touched a 138.89 buy point (1) the week of Jan. 22. But the stock held a less-than-ideal RS Rating of 79.

Shares continued higher for a few days but the breakout lost momentum around Jan. 29. The breakout ultimately failed and shares have since sold off below their 50-day line (2). The RS Rating continued to fall in the weeks following the attempted breakout.

This article was originally published March 12, 2021, and has been updated. 

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