You will not see many texts or articles around Ratio charts. However, many traders consider that as a serious and important tool to decide how to allocate their assets.
In simple terms, Ratio charts are simply charts that divide one scrip with that of another. As an example, if you divided SPY with that of PTTRX, and plotted the trend, it would provide you with a graph that would present the relative performance of SPY against Pimco's bond fund PTTRX.
An article
Relative Strength Today: Ratio Charts by Ed Carlson that is a good tutorial and worth a read.
Now let's analyze the Ratio chart of SPY and PTTRX below with a simple rule:
When the 100 day minima is breached downward, allocate heavily in PTTRX and reduce exposure to SPY. Likewise, when the ratio value goes above previous breached 100 days minima, allocate more heavily towards SPY and reduce exposure to PTTRX.
A very simple strategy like the one noted above would have resulted in identifying the macro picture of bonds outperforming index in 2000 and 2008 well before the crash.
The current macro picture continues to favor SPY instead of bond and a crash (as touted by several financial pundits) is not immediately visible. Unless the 100day minima of Index versus Bond is breached, stay strong, safe and invest in equities.
