Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_6

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Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_6 SUMMARY 203202 RELATIVE-STRENGTH ANALYSIS OF COMMODITIES By using two different time spans (such as 100 and 25 days) the trader is able to FIGURE 11.14study not only the rankings, but any shifts taking place in those rankings. Relative- THE SUGAR/CRB RATIO (UPPER CHART) LOOKS BULLISH BUT NEEDS AN UPSIDE BREAKOUTstrength numbers alone can be misleading. A market may have a relatively high TO RESUME ITS UPTREND. THE COFFEE/CRB RATIO (BOTTOM CHART) HAS JUST COMPLETED A BULLISH BREAKOUT. ALTHOUGH SUGAR HAS A HIGHER RATIO VALUE (104 FOR SUGARranking, but that ranking may be weakening. A market with a lower ranking may be VERSUS 97 FOR COFFEE), COFFEE HAS A BETTER TECHNICAL PATTERN. BOTH MARKETS AREstrengthening. While the relative rankings are important, the trend of the rankings INCLUDED IN THE CRB IMPORTED CROUP INDEX AND ARE RALLYING TOGETHER.is 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 in Sugar/CRB Index Relative Ratio-100 Daysthe 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 COMMODITIESFigure 11.13 shows the lumber/CRB ratio in the upper box; the orange juice/CRB ra-tio is shown in the lower chart. These markets rank one and two over the past 25 days.FIGURE 11.13TWO STRONG PERFORMERS IN LATE 1989-EARLY 1990. THE TOP CHART SHOWS A LUM- Coffee/CRB Index Ratio-100 DaysBER/CRB INDEX RATIO. THE BOTTOM CHART USES A 40-DAY MOVING AVERAGE ON THE OR-ANGE JUICE/CRB RATIO. BOTH MARKETS HAVE BEEN STRONG BUT LOOK OVEREXTENDED.MARKETS WITH HIGH RELATIVE-STRENGTH RANKINGS ARE SOMETIMES TOO OVERBOUGHTTO BUY. Lumber/CRB Index Relative Ratio-100 Days (Orange juice ranked first over the previous 100 days, and lumber ranked seventh). Figure 11.14 shows the ratios for sugar (upper box) and coffee (lower). Although sugar Orange Juice/CRB Index Relative Ratio-100 Days has the higher.ranking over the previous month, coffee has the better-looking chart. Figure 11.15 shows a couple of weaker performers that are showing some signs of bottoming action. The cotton ratio (upper box) and the soybean oil (lower chart) have just broken down trendlines and may be just starting a move to the upside. Figure 11.16 uses copper as an example of a market near the bottom of the relative strength ranking that is just beginning to turn up. SUMMARY This chapter applied relative-strength analysis to the commodity markets by using ratios of the individual commodities and commodity groups divided by the CRB In- dex. By using relative ratios, it is also possible to compare relative-strength numbers for purposes ...