Last Update: August 2021

In response to last week’s enlightening post on The Magical Properties of the Dow/Gold Ratio, I received a great question from one of you trading tycoons. Okay, I’ll give him a shout-out – thanks to Nicholas Kingsbury for the insightful question.

Side note: you, too, can receive one of these coveted shoutouts someday. I mean, who wouldn’t want one? Here’s the trick: be engaged, make comments, and the like. If your query or blathering gets the pistons firing in my idea factory, for a blog post you win a shout-out. Deal?

Here’s the question: Is there a good place one can get ratio graphs like that? Why, yes; yes indeed. I used stockcharts.com to create the ratio chart.

Suppose Stockcharts.com slighted you somehow in the past and you’ve sworn you’ll never go there again. (Your loss, but whatevs). There’s actually an indicator in most charting platforms that displays a ratio chart. I’ll use ThinkorSwim charts since most of you probably use that platform. Let me provide a little background first, and a vocabulary lesson for the rookies. Two words: absolute and relative.

On an absolute basis, I’m strong, but relative to Tim Justice (whose likeness I used in my image above) I’m weak sauce.

On an absolute basis, I’m handsome, but relative to Channing Tatum, I’m a troll. (He’s good-looking, or so I’m told).

Now, closer to home. The absolute performance of Facebook was solid this year. FB stock ascended 35%. Relative to Netflix, however, FB sucked. NFLX galloped 164% higher. It’s like that dinner scene in the movie Hook where Rufio and Peter Pan are volleying insults back and forth, except its Facebook and Netflix. By himself, Facebook (Rufio) is a stud, but compared to Netflix (Peter Pan) he just can’t hack it.

When using the term absolute, we’re talking about something in a vacuum. When using the term relatively, we’re making a comparison. While some stocks may look good on an absolute basis, they could appear horrible relative to something else. Got it?

This is the whole idea behind phrases like relative strength and relative weakness. Such comparisons are what constitute the relative strength study you can display below your chart in ThinkorSwim. It’s plotted as a simple line which rises when your stock is outperforming whatever benchmark you’re comparing it to and falls whenever your stock is underperforming.

That, my friends, is the same exact thing illustrated in a ratio chart. The Dow/Gold ratio rises when the Dow is outperforming gold and falls when it’s underperforming. Was I to chart the Dow and add a relative strength indicator with gold as the benchmark it would look identical to the stockcharts.com ratio chart I showed last week.

Relative strength is a useful metric for a number of reasons, chief among them being trade discovery. Knowing which asset, sector, or stock is leading the market can narrow down your search and help you in focusing on buying the best of the best, or shorting the worst of the worst. Want to know which tech stocks are besting the Nasdaq Composite? Look at their relative strength indicator with QQQ as the benchmark.

Do you want to know if bonds are doing better than stocks? Look at SPY with a relative strength indicator using TLT as the benchmark (or vice versa). Or, how about oil versus energy stocks? Use USO and compare it to XLE. The variations are endless.

Ok. I’m off to the gym. Timmy’s picture above has motivated me.

Financial freedom is a journey

The Tales of a Technician series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

# Sign up now for a 15-DAY FREE TRIAL #

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisers, to determine whether such trading or investment is appropriate for that user.