Estimate market movements with Ratio Charts!
Over the past few months, you were given an in-depth overview of several essential aspects of technical analysis. In doing so, I highlighted the power of combining different indicators and averages for a more accurate picture of market movements. Today, we will go over a new concept: Ratio Charts.
1. Relative Strength in Stocks and Indices
One of the key concepts I discussed is applying relative strength to individual stocks as well as broader indexes and sectors. This allows you to identify the strong performing segments of the market and avoid the laggards.
2. Analysis of Market Momentum.
I also explored the fascinating world of market momentum. Using techniques such as quadrant analysis, you can clearly identify market trends and better exploit potential opportunities.
3. Case Study: NVDA and Benchmark Indices
Finally, last month I focused specifically on NVDA stock . In my opinion, the stock is a precursor to the current technology cycle.
The current cycle, which began in October 2022, shows no significant divergence between NVDA and benchmark indexes. Thus, this means that the cycle is not yet over.
If both titles break key support zones then it is crucial to act quickly. Currently, NVDA is admittedly showing some weakness as the stock is not yet trading higher than its peak level of two months ago.
The S&P 500 stock market index does make a new top.
With NVDA’s quarterly results on Wednesday, May 22 – still unknown at this writing – it is understandable that investors are broadening their horizons and targeting other sectors for now.
The Added Value of Ratio Charts
While the analyses discussed earlier are valuable, ratio charts offer additional value. By examining the relationship between two titles, Ratio charts offer a unique perspective within technical analysis.
Those two charts can be stocks, indices, commodities or others. The concept is simple: take two titles, Title A and Title B, and examine the relationship between their price levels.
A well-known example of a ratio chart is the ratio of gold mines (GDX) to silver mines (SIL), which is regularly shown during our monthly webinars.
The ratio chart comparison between Gold Mines and Silver Mines.
On the chart above, the orange curve shows the ratio charts of gold mine shares to silver mine shares.
When this curve drops, it means that the silver mining stocks are outperforming the gold mining stocks. Exactly this condition is crucial and means bullish sentiment within the precious metals sector.
Since October 2023, the curve passed through the upward support line and followed a succession of multiple trend break signals. The downward break through the main horizontal green support zone was the final trend reversal moment and thus important for a position within your investment portfolio.
Analyzing ratio charts
How do I analyze these Ratio charts? As with traditional price charts, I start with chartism: I look at the trend, at peaks and bottoms and at key zones to detect reversals.
An important aspect of the analysis is the available history of both titles. The longer the historical data, the better you are able to analyze key trends and inform your decisions.
Chart 2: Copper versus the Dow Jones Industrials (DJIA)
A second example that illustrates the importance of ratio charts can be seen in the copper market.
With the price of copper recently reaching an all-time high, examining the ratio between copper and the DJIA is key!
The ratio is listed against significant red horizontal resistance. A breakout means significant implications for commodity companies and primarily copper mines.
If you look at the past, namely the situation shortly after the period 1997-2003… you will understand the price reaction after 8 years of sideways movement.
Examples from the commodities sector
Examples of companies active in the commodities sector are:
- Bhp Billiton
- Rio Tinto
- Glencore
For copper mines, I think of:
- Southern Copper Corporation
- Freeport-McMoRan
- Hudbay Minerals
- Antofagasta
- or smaller mines such as Capstone Copper Corporation, Ivanhoe Mines Ltd,…
Tip: Pay close attention to the reason at breakthrough.
The breakout is determined by two variables: the copper price and the stock market index.
If the copper price remains stable and the stock market index falls significantly, this also leads to a breakout of the ratio curve.
What have we learned from this matter from technical analysis?
- Ratio charts offer great value in identifying and tracking trends and momentum shifts.
- Especially in the commodities sector, these charts are invaluable.
- By closely following described analyses, you are better positioned to take timely advantage of important market movements.
