Relative Strength Alert: Will the Anglo American (LON:AAL) share price keep rising?

Finding stocks that can break-out and move higher on news updates is a tactic used by some of the world’s most successful traders. But it’s not a black-box strategy…

Indeed, knowing the factors that drive relative strength in share prices can help you find profitable momentum trades, too. I’m going to use Anglo American (LON:AAL), which has a portfolio of mining operations and undeveloped resources with a focus on diamonds, copper, platinum group metals (PGMs), and bulk commodities and other minerals, as an example of how this can work.

How has the Anglo American (LON:AAL) share price performed?

Anglo American is a speculative, large cap in the Integrated Mining industry and it has a market cap of £27,241m.

Over the past year, the Anglo American share price has risen by 9.75%, which sounds pretty good.

But it’s important to put this in context and look at the market trend. After all, in a rising market where prices are up across the board, that gain might not be as remarkable as it seems.

As it turns out, the FTSE All-Share index actually fell over the past year, which means that stock prices fell on average over that period. So Anglo American has actually done better than it seems. Its shares have a 1-year relative strength of 10.2%.

Why relative strength really matters

Relative strength is a crucial tool in the armoury of technical traders and investors. It’s an instant measure of how a stock has performed in comparison with a benchmark. What's more, research shows that price trends often persist.

Studies by Narasimhan Jegadeesh and Sheridan Titman, who are leading experts on momentum, show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.

Prices can be slow to fully adjust because investors are hesitant to bid prices higher in stocks that have already been on a strong run. This gradual readjustment attracts the attention of other investors, pushing prices higher and higher.

What does this mean for potential investors?

Anglo American is currently among the stocks with the strongest six-month and one-year relative price strength in the market. But momentum on its own is no guarantee of future returns. 

To get a better idea about whether this momentum will continue, it's worth doing some investigation yourself. Indeed, we've identified some areas of concern with Anglo American that you can find out about here.