A stock gives clues about its underlying health all the time, but the clues aren't available using just fundamental analysis.
Price and trends can tell you if a stock is poised to head higher or lower. Another indicator, a stock's Relative Strength line, is also an invaluable tool.
The is hard to find in most charting services, but it's front and center in because of its importance.
The RS line compares a stock's price performance to the S&P 500. When the line is sloping higher, it means the stock is outperforming the S&P 500, a market benchmark; when it's moving sideways, it's more or less in line with the S&P 500 and when it's sloping downward, it's underperforming.
When a stock breaks out, the RS line should be poised to shoot into new high ground or at least be rising sharply. If the line is in new high ground ahead of its — a rare sight — even better.
This was not the case with SolarWinds (SWI) when it tried to clear a cup-with-handle base in January. (1) Its RS line was lagging badly. In March, the stock attempted a second breakout. Its RS line was in better shape but it still wasn't showing uncanny strength. As a result, the breakout stalled in a matter of days. Another factor working against SolarWinds: It was trying to break out from a after a huge run already.
Don't confuse a stock's Relative Strength line with IBD's Relative Price Strength Rating. They're completely different. On a scale of 1 to 99 with the 99 being the best, the RS Rating measures a stock's price performance against all other stocks in the IBD database. A rating of 99 means the stock has outperformed 99% of all stocks based on 12-month price performance.
At its second breakout attempt in March, SolarWinds' RS Rating was a mediocre 73. (2) Keep in mind that from the early 1950s through 2008, the average RS Rating of the best-performing stocks before their big moves began was 87.
After hitting a high of 61.52 on March 14, SolarWinds has lost as much as 30% of its value. Shares crashed 15% on May 1; the company reported solid earnings growth, but notched its third straight quarter of decelerating and gave a dour sales outlook. Its RS Line has been trending lower.