Now that you have learned about the market relative strength chart and the four statuses, we will examine a peer relative strength chart. The peer relative strength chart is read just like a market relative strength chart. A relative strength buy signal is given when a column of X's exceeds a previous column of X's. A relative strength sell signal is given when a column of O's exceeds a previous column of O's. While on a buy or sell signal, the peer relative strength chart can change columns and this is an indication of near term weakness or strength. The signals are longer term in nature and often last several years. Again, these charts measure relative performance not to the broad market but to its particular industry group.

Let's examine the peer relative strength chart of Talbot's (TLB), a women's clothing store. The peer relative strength readings can be particularly helpful in very large sectors like retail where there are a variety of sub-sectors such as Retail Apparel, Retail Broadline, Retail Drug-based, and Retail Specialty. By looking at which stocks within a sector have positive peer relative strength, it can help you narrow your focus.

The first signal on this chart is a double top buy signal on May 12th 1999. This told us that the peer relative strength of TLB turned positive and instead of buying a basket of retail stocks, we would be better off focusing on TLB. During the time that the peer relative strength chart was on a buy signal, there were pullbacks in that chart but it did not move to a sell signal until March 29th 2001. During the time that TLB had a positive peer relative strength reading, the stock was up 149.5% while the DWA Retail Index (DWARETA) was down 1.59%. Clearly, TLB was a better place to be than an overall exposure to the retail industry.

On March 29th 2001 the peer relative strength chart suggested that TLB should now begin to underperform the broad based DWA Retail Index after a couple of years of outperformance. Well, that peer relative strength sell signal has been in effect for five years now. From March 29th 2001 to the end of the second quarter 2006, TLB has lost 54.38% while the DWA Retail Index (DWARETA) is up 34%.

The relative strength charts are designed to help us determine how an individual issue should perform compared to a base index. They are not designed to tell us the absolute direction of the stock. For instance, if the peer relative strength chart of TLB were on a buy signal and the stock were down 10% but the DWA Retail Index (DWARETA) was down 20%, the stock performed just as expected - it didn't go down as much as the overall sector and thus exhibited positive peer relative strength. In later sessions, you'll learn about identifying those sectors most likely poised for positive trends.