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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Price Persistence

What it is:

Also called relative strength, price persistence is the tendency of a security's price to stay on trend relative to a market index such as the S&P 500. It is a measure of momentum.

How it works (Example):

For example, let's assume the stock of Company XYZ has been steadily increasing over the last six weeks. The stock price was $10 at the beginning of the six weeks; it is now at $18 -- an 80% increase. The S&P 500 during that time increased by 15%. If price persistence holds true, XYZ stock should continue to go up until it hits a resistance line.

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Why it Matters:

The basic idea behind price persistence is that if Company XYZ's shares have been increasing (or decreasing) over the last several weeks, the shares will likely continue to increase (or decrease). Although price persistence can give investors an excuse to sit back and "ride" a stock if it is heading up (or dump a stock if it is heading down), price persistence might also signal that a stock is becoming overpriced (or underpriced, if the persistence is heading in the other direction). One reason for this is that price persistence is based solely on historical performance and thus does not incorporate future performance.

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