How To Use Ratio Analysis To Identify RS
Bo Harvey
will be writing today’s article in place of Dave.
From a daily/weekly standpoint,
the S&P remains mired in a trading range at these levels, with clear lines in
the sand above and below. Just remember that the longer the range continues,
the more powerful and swift the ensuing move up or down could be.
I continue to focus mainly on
Forex and gold stocks. The Gold Bugs Index (HUI) and Gold and Silver Index (XAU)
enjoyed a textbook bounce off long term support levels, and have now pulled back
after testing the 200 day EMA. Right now we have downtrending 200 day EMAs in
these indices, while long-term, uptrending trendlines and Fibonacci support
remain below. These conflicting indicators have me expecting a period of
consolidation and trading range before one or the other wins out. Whenever long
term indicators are in conflict such as this, a tug-of-war often ensues between
the various systems that trade them until the standoff is eventually broken.
Today I would also like to
touch upon how one can use ratio analysis as a way of identifying relative
strength within sectors. As an example, there are several mining stocks that
have held up better than others during the recent downturn in the sector, and
these would be the first ones I would look at if they return to favor, while I
would focus on the weaker ones should trendline support give way.
Wheaton Minerals (WHT) is an
example of a strong mining stock; below is a chart of the ratio of WHT to the
HUI, and, as you can see, it has outperformed the index (i.e., the ratio is
uptrending) well:
Another strong stock in the
sector is Gammon Lake Silver (GRS), which had a nice breakout in its ratio to
the HUI:
DROOY (Durban Roodeport) has
been very weak relative to the sector, as seen by the well-defined down trend
channel below in the DROOY:HUI ratio:
As always, feel free to email
if you have any questions regarding ratio analysis. Next week I intend to cover
how ratios can help uncover clues to intermarket relationships.
Have a great trading week,
Bo