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Lesson 5: Part 2 - Continued - Favored Sector Status

Now, let's bring the pieces of puzzle together with Favored Status. The concept behind the Favored Status ranking is to marry relative strength readings with the bullish percent concept we know works so well. Each ranking alone is a valuable tool but the Favored Status ranking really gives life to these individual indicators. The four criteria we use to assign a Favored Status ranking for sectors are as follows;
  • Sector Relative Strength: Price of Sector Index Divided by S&P 500 Equal Weight Index and then multiplied by 100. The number is plotted on a chart to create a relative strength chart. With this chart we look at the current column. If the column is in X's that is counted as a positive.

  • Percent Positive Trend (PT Chart): Percent of Stocks within the sector trading above their bullish support lines; i.e. the percent of stocks classified as being in a positive trend. To evaluate this chart, we look at the column. A column of X's would be counted as a positive for the sector.

  • Percent Relative Strength on a Buy Signal (RSP Chart): Percent of Stocks within the sector that have their relative strength charts versus the market on a buy signal. With this chart we look at the current column. A column of X's would be counted as a positive for the sector.

  • Percent Relative Strength in X's (RSX Chart): Percent of Stocks within the sector whose near term relative strength is positive; i.e. their relative strength charts are in a column of X's. With this chart, we look at the signal, buy or sell, double top or double bottom. A buy signal would be counted as a positive for the sector.


Now that we have defined the Favored Status indicators and how we look at the charts, let's take a look at how Favored Status is determined. For each sector these indicators comprise a score of 0 to 4. When the majority of these indicators are positive, that sector should be a market leader and it is where we would concentrate most of our new money going into the market. Once the sector no longer has the majority of indicators in its favor, then we must begin to think about defensive strategies. New positions in sectors where the majority of indicators are not positive suggest we should expect trading rallies only, not market leadership qualities. Once we have established the score, we then assign the sector a Favored Status according to the following template:

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