Using A Ratio Chart

With $SPY- SPDR S&P 500 ETF(NYSEARCA:SPY) up so much in the past few days, I really didn’t find many charts that were actionable tonight. While overall there is a good chance the recent strength continues to develop, a few days of sideways or even weakness could be in order. With that being said, I decided to look at some ratio charts to see if I could spot any trends that have been developing.

Ratio charts are a good way to assess the strength of an stock versus the market or another peer. In a strong market it can be easy to confuse general market strength as sector strength since the majority of assets will follow the general trend. However, a ratio chart against a market index can reveal how an asset is performing against the trend. In this case, I am taking a look at some industry ETF’s against $SPY. While there are no hard and fast rules, in general you can treat ratio charts much like any chart. An uptrend is an uptrend and a downtrend is a downtrend.

The first chart is showing $IYR versus $SPY. It is clear to see that REIT’s have been performing well over the past few months. In fact, in looking at several individual charts like $SPG $KIM and $ESS, I see stocks that are likely to find support on any weakness.

Biotechs have been hot,hot,hot and this ratio chart reveals that this trend has been occurring since late last year. While it’s fun to try and pick a top, this industry remains in a solid trend. While some biotechs are surely in need of rest, $IBB is at all time highs which is tough to bet against.

I’ve been on some oil stocks recently like $IOC after noticing some strength on a weak day. While oil service stocks as represented by $XLE have actually been trading well when compared to $SPY  over the past month, the longer term trend is clearly down. This may result in some pressure in this space on any market weakness. Stocks like $HAL are quite extended and approaching resistance levels.

Obviously, ratios bottom and top just like stocks do, but often it takes much backing and filling before a reversal. These are only a few examples, but there are other interesting ratios currently developing such as $XHB:$SPY (surprisingly strong).

While many charting packages allow you to graph ratio charts, I typically use stockcharts.com. All you have to do is put a semicolon between two tickers to graph its ratio. Give it a try if you’ve never used them before.

Good Trading,

Joey

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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