OTH FINANCIAL AVERAGES TREND IN THE OPPOSITE DIRECTION OF THE CRB INDEX.TREASURY BONDS FAILED TO CONFIRM THE RALLY TO NEW HIGHS BY THE UTILITIES AT BOTHTHE 1987 AND THE 1989 PEAKS.Dow Utilities versus Bond Futures
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THE DOW UTILITIES AS A LEADING INDICATOR OF STOCKS
SUMMARY
185
The CRB peak in mid-1988 helped launch the rallies in bonds and utilities thatlasted for a year. Finally, the CRB bottom in the autumn of 1989 began the toppingprocess in bonds and utilities. We've established that utilities are positively linked tobonds, and that bonds are negatively linked to commodities. It follows, then, that theDow Utilities are also negatively linked to commodities. Any significant rally in thecommodity markets will push interest rates higher and bond prices lower, which isbearish for the utilities. Downtrending commodity markets will be bullish for bondsand eventually for utilities as well.
and that both bonds and utilities usually lead turns in the broader market. The 1987peaks provide an excellent example of that interplay. The Dow Jones Utility Averagehas become a part of the intermarket analysis and takes its place in the analysis ofthe U.S. dollar, commodity prices, bonds, and stocks. Its proper place lies betweenbonds and the industrial stock' market averages. Utilities provide another vehicle fordetermining the impact inflation and interest rate trends are having on the stockmarket as a whole. Analysis of the utilities also provides another way to measureinterest-sensitive stock groups, a topic discussed in Chapter 9.
BONDS, UTILITIES, AND THE DOW INDUSTRIALS
SUMMARY
The final comparison links bonds, the Dow Utilities, and the Dow Industrials. Figure 10.10 shows all three markets over the last five years. The upper chart overlaysTreasury bonds and the Dow Jones Utility Average. The bottom chart plots the DowJones Industrial Average. The chart shows that the utilities are closely linked to bonds,
The Dow Jones Utility Average (which includes 15 utility stocks) is the mostwidely-watched utility index. Because utility stocks are so interest rate-sensitive, theyusually are impacted by interest rate changes before the general market. As a result,utilities usually follow the lead of bond prices and, in turn, usually lead the DowIndustrials at important turns. With one exception, (1977), the Dow Utilities havepeaked ahead of the Dow Industrials every time since 1960 with an average leadtime of three months. The Dow Utilities have more of an impact on the industrialsduring times when stocks are especially sensitive to interest rates. The reasons theutilities are so interest-sensitive are because of their heavy borrowing needs andtheir relatively high dividends (which compete directly with yields in money marketfunds and certificates of deposit). The defensive qualities of utilities make themespecially attractive during economic downturns and also explain their relativelystrong performance at stock market bottoms.Although most of the 15 stocks are electric utilities (which are more interest-sensitive), some gas companies are included, which can be influenced by changesin natural gas prices. At market peaks, in particular, natural gas companies have atendency to lag behind the electric utility stocks. The explosion in energy pricestoward the end of 1989, and the relatively strong performance of gas companiesduring that fourth quarter, may partially explain why the Dow Utility Average setnew highs as 1989 ended.Because of their strong link to bonds and their tendency to lead the stockmarket, the utility stocks fit into the growing intermarket arsenal. The stock market isinfluenced by the utility stocks, which are influenced by the bond market and interestrates. Bonds and interest rates are influenced by commodity trends which, in turn,are affected by the trend of the U.S. dollar. Given their impressive record as a leadingindicator of the Dow Industrials, I suspect that if Charles Dow were alive today, he'dmake the Dow Utilities an integral part of his Dow Theory.
FIGURE 10.10BONDS AND UTILITIES (UPPER CHART) USUALLY LEAD THE STOCK MARKET (BOTTOM CHART)AT IMPORTANT TURNING POINTS. IN THE FIRST HALF OF 1987, BONDS AND UTILITIESTURNED DOWN AND PROVIDED A WARNING THAT THE STOCK MARKET RALLY HADREACHED A DANGEROUS STAGE.Utilities versus Bond Futures
Dow Jones Industrial Average
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RELATIVE-STRENGTH RATIOS
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we'll be looking at (with the exception of gasoline). There are several ways commoditytraders can employ relative-strength analysis to facilitate trade selection. To begin, agroup selection approach will be used.GROUP ANALYSIS
Relative-Strength Analysisof Commodities
Utilizing the seven commodity sub-indices provided by the Commodity ResearchBureau, we'll determine which groups have turned in the best performance on arelative-strength basis. The use of group analysis simplifies the trade selection processand helps commodity traders determine which commodity sectors are turning in thestrongest or the weakest performances. Buying should be concentrated in the strongestsectors and selling in the weakest. After isolating the best group candidates, therelative-strength comparisons within those groups will be considered. The relativeperformance between the two leading groups will also be compared to see which isthe best bet. Group analysis doesn't always tell the whole story, however.INDIVIDUAL RANKINGS
In stock market work, relative-strength analysis is very common. Portfolio managersmove their money into those stock groups they believe will lead the next stock marketadvance or, in a down market, will decline less than the other groups. In other words,they're looking for those stock groups or stocks that will outperform the general marketon a relative basis. The group rotation process is scrutinized to determine which stockgroups are leaders and which are laggards. Stock groups and individual stocks arecompared to some objective benchmark, usually the Standard and Poor's 500 stockindex. A ratio is calculated by dividing the stock group or the individual stock bythe S&P 500 index. If the relative-strength (RS) line is rising, the other entity isoutperforming the general market. If the relative-strength (RS) line is declining, thestock group or stock is underperforming the market.There are two major advantages to the use of relative-strength analysis as a technical trading tool. First, another confirming technical indicator is created on the pricechart. If technical traders see a breakout on their price chart or some technical evidence that an item is beginning a move, they can look to the relative-strength line foradded confirmation. Bullish action on the price chart should be confirmed by a risingrelative-strength line. Divergence can play a role as well. A price move on the chartthat is not confirmed by the RS line can create a divergence with the price action andwarn of a possible trend change.The second advantage lies in the ability to rank various items according to relativestrength. By normalizing the relative-strength numbers in some fashion, traders canrank the various groups or individual items from the strongest to the weakest. Thiswill enable them to focus their attention on those items with the greatest relativestrength (if they're looking to buy) or the lowest relative strength (if they're looking tosell). In this chapter, the same principles of relative-strength analysis will be appliedto the commodity markets. Since the chapter will be dealing with commodity marketsinstead of stocks, the Commodity Research Bureau Futures Index will be employed.All that is required for relative-strength analysis is the availability of some objective benchmark that commodity groups and individual commodities can be measuredagainst. The logical choice is the CRB Index, which includes all of the commodities186
Individual market comparisons can also help isolate which markets are turning inthe best relative-strength performance. In this section the individual markets will beranked by relative performance over two time periods to see which ones qualify asthe best buying or selling candidates. The reason for using two time periods is to seeif a market's relative ranking is improving or deteriorating. Suggestions will be madeabout how traders might incorporate this information into their overall trading plans.RATIO ANALYSIS
Ratio analysis is generally employed in relative-strength analysis. (Relative-strengthanalysis in this context refers to the comparison of two entities, utilitizing price ratios,and is not to be confused with the Relative Strength Index, which is an oscillatordeveloped by Welles Wilder.) Ratio charts allow comparisons between any two entitiesregardless of how they are priced. Some commodities are priced in cents per bushel,dollars per ounce, or cents per pound. The CRB Index is priced in points. Ratioanalysis allows for universal comparisons. The ability to compare any two entities isespecially important when making comparisons between different financial sectors,such as the CRB Index (commodities), foreign currencies, Treasury bonds, and stockindex futures, a subject that will be discussed in Chapter 12. However, there's stillsomething else needed.RELATIVE-STRENGTH RATIOS
When one entity is divided by another, a value or quotient is the result. These valuescan be plotted on a chart and compared with other values or ratio lines. However, theactual value will be influenced by the price of the numerator. Assuming a constantdenominator, if the commodity in the numerator has a higher value than anothercommodity, the resulting quotient will also be higher. Therefore, a more objectivemethod is required in order to compare the ratio values. A relative ratio does twothings. First, it creates a ratio by dividing one entity (such as a commodity) by anotherentity (such as the CRB Index). It then creates an index with a starting value of 100,which begins at any time interval chosen by the trader.
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
This study will be using time spans of 25 and 100 trading days in the examples,although any period could have been chosen. The computer will give each ratio astarting value of 100 for any time period chosen. By doing so, it is possible to comparerelative values. For example, one ratio may show a value of 110 over the selected timespan. Another may show a ratio of 90. This means that the ratio of 110 increased by10 percent during the time span chosen. The ratio of 90 declined by 10 percent duringthe same period. The market with a ratio of 110 outperformed the market with 90and will have a higher relative-strength ranking. The relative ratio lines will look thesame as ordinary ratio lines on the chart. The major advantage of the relative ratio isthe ability to compare the actual ratio values on an objective basis and then to rankthem according to relative performance.GROUP COMPARISONCompare the relative performance of the seven CRB Group Indexes in the 100 daysspanning October 1989 to mid-February 1990. By using a relative ratio and choosing a100 day time period, it is possible to determine a relative ranking of the seven groupsover the latest five-month period.*1.2.3.4.5.6.7.
Energy (104.46)Precious Metals (104.38)Livestock & Meats (102.82)Imported (97.03)Industrials (95.97)Oilseeds (95.54)Grains (95.39)
Before even looking at a chart, some useful information is available. It is knownthat, during the previous 100 trading days, the energy and precious metal groupsturned in the best relative performance, whereas the grains were the weakest. (Goldand energy stocks were also the two best performing stock market groups duringthis same time period.) The premise of relative-strength analysis is similar to thatof trend analysis—that trends persist. The basic assumption is that if one is lookingfor markets with bullish potential, a logical place to start is with those markets thathave demonstrated superior relative performance. There's no guarantee that superiorperformance will continue, but it provides a place to start. The next step is to analyzethe ratio charts themselves.COMMODITY GROUP RATIO CHARTSFigures 11.1 through 11.3 plot the two leading groups (energy and precious metals)and the weakest group (the grains). Each Figure shows the actual commodity groupindex in the upper chart and the relative ratio line in the lower chart. The time spanon all the charts is 100 trading days. The relative ratio simply divides the group indexin question by the CRB Index. Chart analysis can then be applied to the group indexitself and the ratio line. As a rule, they should trend in the same direction.'See Chapter 7 for an explanation of the CRB Group Indexes.
COMMODITY GROUP RATIO CHARTS
189
FIGURE 11.1THE UPPER CHART SHOWS THE CRB ENERGY GROUP INDEX OVER 100 DAYS. THE LOWERCHART IS A RELATIVE RATIO Of THE ENERGY GROUP INDEX DIVIDED BY THE CRB INDEX.RATIO LINES CAN BE COMPARED TO THE ACTUAL INDEX FOR SIGNS OF DIVERGENCE. TRENDLINES CAN BE EMPLOYED ON THE RATIO ITSELF. AFTER BEING THE BEST-PERFORMING COMMODITY GROUP IN LATE 1989, ENERGY FUTURES LOST GROUND IN EARLY 1990.Commodity Research Bureau Energy Group lndex-100 Days
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
FIGURE 11.2A COMPARISON OF THE CRB PRECIOUS METALS CROUP INDEX (UPPER CHART) AND A RELATIVE RATIO OF THE PRECIOUS METALS INDEX (LOWER CHART) DIVIDED BY THE CRB INDEXOVER 100 DAYS. PRECIOUS METALS WERE THE SECOND STRONGEST COMMODITY GROUP INTHE FOURTH QUARTER OF 1989. THE BREAKING OF THE UP TRENDLINE IN LATE DECEMBERSIGNALED THAT THE PRECIOUS METALS' RELATIVE STRENGTH WAS SLIPPING.
COMMODITY GROUP RATIO CHARTS
191
FIGURE 11.3THE CRB GRAIN GROUP INDEX (UPPER CHART) IS COMPARED TO A RELATIVE RATIO OFTHE GRAIN INDEX DIVIDED BY THE CRB INDEX (BOTTOM CHART) OVER 100 DAYS. GRAINSWERE THE WEAKEST COMMODITY GROUP AS 1990 BEGAN BUT ARE SHOWING SIGNS OFSTABILIZING. IN LATE 1989, THE RATIO TURNED DOWN BEFORE THE ACTUAL CRB GRAININDEX.
Commodity Research Bureau Precious Metals Group lndex-100 Days
Commodity Research Bureau Grain Group lndex-100 Days
Relative Ratio of CRB Precious Metals Index Divided by CRB lndex-100 Days
Relative Ratio of CRB Grain Index Divided by CRB lndex-100 Days
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RELATIVE-STRENGTH
ANALYSIS OF COMMODITIES
ENERGY GROUP ANALYSIS
Having identified the two strongest groups, the trader should look within each groupfor the best performing individual commodities. Figures 11.4 through 11.6 plot therelative performance of the three energy markets: crude oil, unleaded gasoline, andheating oil. The energy group turned in the best performance, with a 100-day relativeratio of 104.46. This means the group as a whole gained 4.46 percent during theprevious 100 days relative to the CRB Index. The rankings among the three energymarkets are:
ENERGY GROUP ANALYSIS
FIGURE 11.5UNLEADED GASOLINE FUTURES (UPPER CHART) COMPARED TO A GASOLINE/CRB INDEX RATIO (LOWER CHART). BOTH CHARTS ARE SIMILAR. ANY VIOLATION OF THE LOWER TRADINGBANDS WOULD BE BEARISH FOR GASOLINE. GASOLINE FUTURES OUTPERFORMED THE CRBINDEX BY 11 PERCENT IN THE PREVIOUS 100 DAYS BUT LOST 10 PERCENT FROM THEIR JANUARY PEAK RELATIVE TO THE CRB INDEX.April 1990 Unleaded Gasoline Futures Contract-100 Days
1. Crude oil (112.24)2. Gasoline (111.39)3. Heating oil (103.11)These rankings would suggest that long positions be placed with crude oil asopposed to the products, assuming that the trader is bullish on the group. If thetrader is bearish on energy prices, the products would qualify as better short-salecandidates.FIGURE 11.4CRUDE OIL FUTURES (UPPER CHART) COMPARED TO A CRUDE OIL/CRB INDEX RATIO (BOTTOM CHART) OVER 100 DAYS. THE BULLISH BREAKOUT IN CRUDE OIL IN LATE NOVEMBEROF 1989 WAS CONFIRMED BY SIMILAR BULLISH ACTION IN THE OIL/CRB RATIO. BOTH ARETESTING UP TRENDLINES.April 1990 Crude Oil Futures Contract-100 Days
Relative Ratio of April Crude Oil Divided by the CRB lndex-100 Days
193
Relative Ratio of Gasoline Divided by CRB lndex-100 Days
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
FIGURE 11.6HEATING OIL FUTURES (UPPER CHART) COMPARED TO A HEATING OIL/CRB INDEX RATIO(BOTTOM CHART). HEATING OIL HAS BEEN THE WEAKEST OF THE ENERGY MARKETS DURING THE LAST 100 TRADING DAYS. IF THE ENERGY MARKETS BREAK DOWN, HEATING OILMAY BE THE BEST SHORT-SELLING CANDIDATE BECAUSE OF ITS WEAK RELATIVE-STRENGTHRANKING.
PRECIOUS METALS GROUP ANALYSIS
195
FIGURE 11.7GOLD FUTURES (UPPER CHART) COMPARED TO A GOLD/CRB INDEX RATIO (BOTTOM CHART).GOLD HAS OUTPERFORMED THE CRB INDEX BY 9 PERCENT DURING THE PREVIOUS 100 DAYSBUT IS LOSING MOMENTUM. THE RATIO LINE HAS ALREADY BROKEN A MINOR SUPPORTLEVEL AND MAY BE SIGNALING IMPENDING WEAKNESS IN GOLD.April 1990 Cold Futures Contract-100 Days
April 1990 Heating Oil Futures Contract-100 Days
Relative Ratio of April Gold Divided by the CRB lndex-100 DaysRelative Ratio of Heating Oil Divided by CRB lndex-100 Days
PRECIOUS METALS GROUP ANALYSIS
Figures 11.7 through 11.9 plot the three precious metals (gold, platinum, and silver)in order of their own performance relative to the CRB Index. Over the past 100 days,these are the relative rankings of the three precious metals:1. Gold (109.20)2. Platinum (105.40)3. Silver (95.92)The relative ratio for gold appreciated by 9.2 percent over the past 100 days, andplatinum by 5.4 percent. The silver ratio actually lost 4.08 percent. These rankingssuggest that of the three, gold is the strongest, platinum is the second strongest, andsilver, a weak third. This technique would suggest that primary emphasis should be
put on the long side of gold and platinum, if the trader is bullish on the group. If thetrader is bearish on precious metals, silver would be the best short sale.Ratio analysis within a group can also be helpful in finding the one or twocommodities that are most likely to outperform the others. Ratio analysis will beapplied to the precious metals markets to see what conclusions might be found.Figure 11.10 is a platinum/gold ratio during the 100 days from October 1989 to midFebruary 1990. This is the same time horizon being used for all the examples. Thechart on the top and the relative ratio along the bottom both show that gold hasoutperformed platinum over the past few months. Although both have been movingupward, gold has been the better relative performer. However, as the ratio chart on thebottom of Figure 11.10 shows, this may be changing. On a relative strength basis, theplatinum/gold ratio has broken a down trendline and is breaking out to the upside.This relative action would suggest that traders in the precious metals should beginswitching some capital out of gold into platinum on the assumption that platinumwill now be the stronger of the two.
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
FIGURE 11.8PLATINUM FUTURES (UPPER CHART) COMPARED TO A PLATINUM/CRB INDEX RATIO (BOTTOM CHART). ALTHOUGH BOTH CHARTS ARE SIMILAR, THE RATIO LINE IS LAGGING BEHINDPLATINUM FUTURES. THIS MINOR BEARISH DIVERGENCE MAY BE HINTING THAT THE PLATINUM RALLY WILL BEGIN TO WEAKEN.
PRECIOUS METALS GROUP ANALYSIS
197
FIGURE 11.9SILVER FUTURES (UPPER CHART) COMPARED TO A SILVER/CRB INDEX RATIO (BOTTOM CHART).SILVER HAS BEEN THE WEAKEST OF THE PRECIOUS METALS AND UNDERPERFORMED THE CRBINDEX BY 4 PERCENT IN THE PRIOR 100 TRADING DAYS. UPSIDE BREAKOUTS IN SILVER FUTURES AND THE SILVER/CRB RATIO ARE NEEDED TO TURN THE CHART PICTURE BULLISH.
April 1990 Platinum Futures Contract
March 1990 Silver Futures Contract
Relative Ratio of Platinum Divided by CRB Index
Relative Ratio of March Silver Divided by the CRB Index
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
FIGURE 11.10GOLD AND PLATINUM FUTURES (UPPER CHART) ARE COMPARED TO A PLATINUM/GOLD RATIO (BOTTOM CHART). ALTHOUGH GOLD WAS STRONGER DURING THE FOURTH QUARTEROF 1989, THE BREAKING OF THE DOWN TRENDLINE BY THE RATIO IN JANUARY 1990 SUGGESTS THAT PLATINUM IS NOW THE STRONGER. BULLISH TRADERS WOULD BUY PLATINUM.BEARISH TRADERS WOULD SHORT COLD.Gold versus Platinum
GOLD/SILVER RATIO
199
GOLD/SILVER RATIO
Figure 11.11 shows the gold/silver ratio over the same 100 days. Since the ratio linehas been rising, we can see that gold has outperformed silver by a wide margin.However, the up trendline drawn from the November lows has been broken. If theratio starts to weaken further, this would suggest that silver is undervalued relativeto gold and implies that silver merits consideration as a buying candidate. Theupper chart compares the actual performance of gold versus silver. While gold isstalled at overhead resistance, silver has yet to rise above its potential basing area.An upside breakout by silver, if accompanied by a falling gold/silver ratio, wouldsuggest that silver is the better candidate for a long position of the two preciousmetals.
FIGURE 11.11GOLD AND SILVER FUTURES (UPPER CHART) COMPARED TO A GOLD/SILVER RATIO (BOTTOMCHART). GOLD HAS OUTPERFORMED SILVER BY 14 PERCENT OVER THE PREVIOUS 100 DAYS.THE BREAKING OF THE RATIO UP TRENDLINE IS SUGGESTING THAT SILVER MAY NOW BETHE STRONGER. HOWEVER, SILVER STILL NEEDS AN UPSIDE BREAKOUT ON ITS CHART TOJUSTIFY TURNING BULLISH.Cold versus Silver
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
GOLD VERSUS OILIt's also useful to compare performance between two different groups of commoditiessuch as metals and energy. The top chart in Figure 11.12 compares gold and crude oilfutures. The bottom chart plots a gold/oil ratio. When the ratio is rising (as happenedduring October and November 1989), gold is the better performer. Since the beginningof December, however, oil has been the better performer (since the gold/oil ratio isdropping). Considering that both gold and oil turned in strong performances duringthe fourth quarter of 1989, money could have been made on the long side of bothmarkets. Relative-strength comparisons between those two strong markets, however,would have given the technical trader an added edge—the ability to direct moremoney into the stronger performing commodity.RANKING INDIVIDUAL COMMODITIESAnother way to rank relative commodity performance is simply to bypass the groupsand list the individual markets by their relative ratios. During this discussion, thisFIGURE 11.12GOLD AND CRUDE OIL FUTURES (UPPER CHART) COMPARED TO A GOLD/CRUDE OIL RATIO(BOTTOM CHART). THROUGH NOVEMBER OF 1989, GOLD OUTPERFORMED OIL AND WASTHE BETTER PURCHASE. SINCE THE BEGINNING OF DECEMBER, OIL DID BETTER. TRADERSCAN USE RATIOS TO CHOOSE BETWEEN BULLISH ALTERNATIVES.Gold versus Crude Oil
Cold/Crude Oil Relative Ratio
RANKING INDIVIDUAL COMMODITIES
201
will be done for two separate time periods—100 days and 25 days. By using twodifferent time periods, it can be determined if the relative rankings of the commoditiesare changing.CommodityLumberOrange juicePlatinumCrude oilSugarCoffeeGoldCattleCocoaCornCottonGasolineSoy. oilSilverHeating oilHogsSoybeansWheatOatsMealCopperBellies
Ranking(last 25 days)105.70*105.62105.59*105.36104.52*104.40*103.27103.04*102.03*101.61*101.23*100.59100.40*100.28*98.2998.1297.2496.1293.5493.0490.88*89.76
CommodityOrange juiceCrude oilGasolineHogsGoldPlatinumLumberSugarHeating oilCattlePorkbelliesCornCoffeeWheatSilverSoy. oilSoybeansOatsSoy. mealCottonCocoaCopper
Ranking(last 100 days)144.34112.24111.39109.41109.20105.40104.40104.34103.11102.7999.5999.1397.7196.8195.9293.9191.1690.0789.0488.8187.2882.77
In the preceding table, two columns of relative-strength rankings are shown. Thesecond column from the left shows the relative ratio (individual commodity dividedby the CRB Index) over the past 25 trading days. Column 4 uses a longer span of100 days. While the longer time span might be more useful for studying longer-rangetrends, the shorter time interval can alert the trader to shorter-term shifts in relativestrength. Column 4 shows that the six best performing markets during the previousfive months were orange juice, crude oil, gasoline, hogs, gold, and platinum. Trendfollowers might want to concentrate on those markets that have been the strongest.Contrarians might focus on those near the bottom of the list such as copper, cocoa,cotton, the soybean complex, and silver on the theory that their downtrends areoverdone.The asterisks alongside some commodities in column 2 mark those that improvedtheir ranking over the previous five months. Those markets with asterisks that havegained ground in the previous 25 days include, in order of strength: lumber, platinum,sugar, coffee, cattle, cocoa, corn, cotton, soybean oil, silver, and copper. Since thosemarkets are showing improved rankings, a trader looking for new long trades mightwant to use this list as a starting point in his search. Special emphasis would beplaced on those candidates higher up on the list.* Those commodities that moved up in the rankings
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RELATIVE-STRENGTH ANALYSIS OF COMMODITIES
By using two different time spans (such as 100 and 25 days) the trader is able tostudy not only the rankings, but any shifts taking place in those rankings. Relativestrength numbers alone can be misleading. A market may have a relatively highranking, but that ranking may be weakening. A market with a lower ranking may bestrengthening. While the relative rankings are important, the trend of the rankingsis more important. The final decision depends on the chart pattern of the ratio line.As in standard chart analysis, the trader wants to be a buyer in an early uptrend inthe ratio line. Signs of a topping pattern in the ratio line (such as the breaking of anup trendline) would suggest a possible short sale. Figures 11.13 through 11.15 showrelative ratios of six selected commodities in the 100 days from September 1989 tomid-February 1990.SELECTED
SUMMARY
203
FIGURE 11.14THE SUGAR/CRB RATIO (UPPER CHART) LOOKS BULLISH BUT NEEDS AN UPSIDE BREAKOUTTO RESUME ITS UPTREND. THE COFFEE/CRB RATIO (BOTTOM CHART) HAS JUST COMPLETEDA BULLISH BREAKOUT. ALTHOUGH SUGAR HAS A HIGHER RATIO VALUE (104