A rising stock is fine. But if the broad market is rising, then how do you know there's anything special about your stock
By looking at the , which gauges your stock against all others.
Why is the RS line so important? As lawyers say, "Res ipsa loquitur," Latin for "The thing describes itself.
The RS line shows how that individual stock is faring compared to the S&P 500, the proxy for the broad market.
The RS line has no numbers. It's a visual thing: Look at it. Is your stock's RS line rising (good) or falling (bad)
And don't confuse the RS line with the Relative Price Strength Rating; they are not the same. The RS Rating compares a stock's price performance against all stocks in IBD's database over a trailing 12-month period.
Even more important is to see the line rising during a broad-market correction.
Remember, downtime for the broad market is often when the best stocks build their bases.
This positive action in a negative environment will surely force that RS line to climb. Then you may notice that the stock is holding its ground, falling less or even rising while the broad market is tumbling.
Finally, the best breakouts often are presaged by a push by the RS line into new high ground. This can be the last clue that your stock is about to make its move.
A clue like that, while not a prerequisite for a stellar run, is priceless when it does appear.
The RS line offered such a heads up for Chinese search-engine juggernaut Baidu (BIDU). In May 2007, the stock had been trading less than two years. Its numbers were beautiful, its story compelling (the dominant search engine in a huge country that was embracing all things computer) and it had already established an uptrend.
The stock built a cup-with-handle base in the 17 weeks through May 14, 2007. Now look at the RS line. Yes, it's rushing toward new high ground, as you'd expect in an emerging leader.
The RS line was telling you that this stock was under more accumulation than could be accounted for by the general market.
Baidu climbed more than 220% to a split-adjusted peak of 42.92 in 2007 before the stock market plunged in 2008. It made another big run from 2009 to early 2011.