The Ratio Line Gave the Clue Before the Dow Broke Out

 

Using a Ratio Line to Read the Market

Today was a great example of how a simple ratio line can give you a real edge when the market is setting up for a big move. The Dow Jones Industrials went on to make new all-time highs, but the clues were there well before price actually broke out. Above is a 30-minute chart of DIA, and in the lower pane I have a ratio line of DIA versus SPY. This is one of my favorite ways to gauge relative strength in real time, especially during choppy or unclear market conditions.

Point A: Early Hints of Bullishness

At point A, DIA made a new low. On the surface, that looks bearish and is exactly the kind of price action that shakes people out or keeps them on the sidelines. But when I shifted my focus to the ratio line, something important stood out. While price made a lower low, the ratio line did not. It stopped making new lows and began to stabilize.

This is a classic bullish divergence. It was the first hint that DIA was starting to outperform SPY, even as price still looked weak. That said, this alone wasn’t enough for me to take a trade. Divergences can last longer than you expect, and I don’t like jumping in just because I see the first sign of potential strength. At this stage, it simply put DIA on my radar and told me to stay alert.

Points B and C: Strength Beneath the Surface

Things really started to get interesting at points B and C. During this entire period, DIA was going sideways. If you were only watching price, it looked like nothing was happening. No momentum, no breakout, just chop. This is where a lot of traders lose interest or start forcing trades in the wrong direction.

But the ratio line was telling a completely different story. Instead of going sideways, it was in a strong, steady uptrend. That meant DIA was consistently outperforming SPY during this consolidation. Even though price wasn’t moving higher yet, relative strength was building underneath the surface.

This is the kind of action I love to see. When price pauses but the ratio line keeps trending higher, it often means the market is coiling up for a move. Institutions don’t always chase breakouts; they often accumulate during quiet, sideways periods. The ratio line helps expose that accumulation.

The Breakout and Entry Opportunity

Once resistance was finally taken out, the picture became much clearer. Price confirmed what the ratio line had been signaling for a while. That breakout was your opportunity to enter the market with confidence, aligned with both price and relative strength.

Instead of chasing the move after it was obvious, the ratio line allowed you to anticipate it. That’s the real value here. You’re not predicting; you’re simply recognizing strength early and waiting for price to confirm.

Gaining an Edge with the Ratio Line

This was just a great example of how using a ratio line can help you gain an edge. It adds context to price action and helps separate meaningful consolidations from random chop. Today’s rally in the Dow didn’t come out of nowhere, the clues were there if you knew where to look.

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RDW Triggers at a Key Cycle Low

 

Above is a daily chart of RDW with its 52-day cycle plotted, a cycle I talked about just a few days ago. Coming into today, RDW was in the time window where I expected a cyclical low to form. That alone doesn’t mean you blindly buy, but it does mean I’m paying very close attention to price behavior. Today, I finally got what I was looking for, a trigger.

When I’m trading cycles, timing is only half the equation. The other half is confirmation from price. A cycle can say “a low should be forming,” but price still has to agree. In RDW’s case, price stepped up right where it needed to. If this cycle plays out the way it has in the past, the expectation is that RDW should begin trending higher over the coming days and weeks. I’m not calling a straight line move, but I am looking for higher highs and higher lows as the cycle turns up.

Risk management is always front and center for me, and this trade is no different. My protective stop would be placed a few ticks below yesterday’s low. That level makes sense structurally and keeps the risk clearly defined. If I’m wrong, I want to know quickly and get out with minimal damage. One of the biggest advantages of trading cyclical lows is that you can often define risk very tightly while still having meaningful upside if the trade works.

In the next chart, I zoomed in on the daily timeframe to better highlight the area where price held. What stands out immediately is the confluence of support. RDW held a significant support zone that includes the .618 Fibonacci retracement as well as prior highs from earlier in the move. Former resistance turning into support is something I always pay attention to, and when that lines up with a key Fibonacci level, it adds weight to the level.

This is where things start to get interesting. When you combine clear price support with an expected time window for a cyclical low, you get what I consider a high-probability setup. That doesn’t mean it’s guaranteed, nothing ever is but it does mean the odds are stacked in my favor. These are the types of trades I want to take again and again over time.

For now, the work is done. I’ve identified the cycle, waited for price confirmation, defined my risk, and taken the trigger. The next step is patience. Now we let the market do what it’s going to do. Let’s see what next week brings.

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TLRY: A Case Study in Relative Weakness

 I received a few emails today asking why I sold part of my TLRY position, so I figured I’d give a quick update for anyone who’s interested and maybe clear up my thinking a bit. This wasn’t an emotional decision or a sudden change in my overall view of the cannabis space. It was simply a response to what the chart was telling me.

If you look at the 5-minute chart of TLRY above, with MSOS in the lower pane, the relative weakness really stands out. Yesterday, MSOS made a much higher high at point B compared to point A. That’s exactly what you want to see when momentum is improving. Now, if TLRY were acting well, you would expect it to do the same thing at the very least, make a similar higher high. Instead, TLRY did the opposite. At point B, it put in a much lower high. That divergence is classic relative weakness, and it immediately put TLRY on my radar.

That said, noticing relative weakness doesn’t automatically mean I hit the sell button especially on a lower time frame such as a 5 minute. I try not to front-run breakdowns. As long as support is holding, a weak stock can still snap back, especially in a sector that’s prone to sharp reversals. That’s why I didn’t sell anything yesterday, even after spotting the divergence. I wanted to see how price behaved at a key level.

This morning gave me my answer. On the open, TLRY broke short-term support, and that was my signal to act. I sold roughly one-third of my position, not because I think TLRY is “done,” but because the risk/reward shifted. When a stock shows relative weakness and then loses support, I’d rather play some defense than just sit there and hope.

My mindset with this trade is simple and flexible. If daily support holds and TLRY turns back up with improving volume and strength, I can always add those shares right back on. There’s no rule that says once you sell, you can’t buy again. I’d much rather re-enter on confirmation than stubbornly hold through a drawdown just to prove a point.

Looking at the daily chart now, TLRY is once again approaching gap support. This is an important area, and how the stock behaves here will tell us a lot. If buyers step in and defend this zone, the recent weakness could end up being nothing more than noise. If it fails, then selling that partial position will have been the right call.

For now, I’m watching closely and letting the chart do the talking.

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So Much for Four Green Days in a Row

 

Nobody expected MSOS to be green four days in a row, did they?  Of course, it would have been nice to see that kind of follow through, but instead we got a red day that completely wiped out the gains from the prior three sessions. That’s the frustrating part about trading this space, just when things start to feel constructive, the rug can get pulled out quickly. Even so, despite today’s disappointment, I still believe we are on the doorstep of an up cycle.

What bothered me most about today wasn’t just the red close, but the lack of follow-through from yesterday’s late day rally. When you see buyers step in during the final hours, you want to see that momentum carry into the next session. Instead, the market opened weak and never really recovered. That’s not what bulls want to see, especially when sentiment has finally started to shift after weeks of grinding action.

That said, the chart isn’t all bad news. If you look closely, MSOS put in a clean double bottom right at 3.89 to the penny, sitting directly on top of the gap fill area. That level clearly mattered. Buyers showed up there twice, and that tells me there is still demand lurking beneath the surface. For now, that support is intact, and as long as it holds, I’m willing to give this trade some room.

Because of that, I’m choosing to sit tight with what I have in MSOS and let things play out. Not every day needs action, and sometimes the best move is no move at all. Chopping yourself up during noisy sessions usually does more harm than good.

One adjustment I did make, however, was in TLRY. This stock has been showing too much relative weakness for my liking. Yesterday, when MSOS pushed to new highs late in the afternoon, TLRY couldn’t even get off the mat. That was a red flag. Then this morning, when we took out yesterday’s low, I sold one-third of my TLRY position. I’m not married to it. I can always add those shares back if and when I see bullish volume and real strength return.

For now, it’s a waiting game. Support has been defined, risk is clear, and patience is required. Let’s see what tomorrow brings.

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Price Was Quiet, Relative Weakness Was Screaming in QQQ

 

Relative Weakness on Display in QQQ

What a great example of relative weakness in QQQ over yesterday and today. This is one of those moments where viewing the market through the lens of relative strength almost feels like having an X-ray machine. You’re not just seeing price, you’re seeing what’s happening under the surface and in this case, the message was loud and clear well before price finally gave way.

Above is a 10-minute chart of QQQ, and in the lower pane is the relative strength ratio of QQQ vs SPY. On the surface, QQQ didn’t look particularly threatening at first glance. Price was chopping sideways, nothing dramatic, nothing that would necessarily scare you out of a position if you were only watching candles.

But the relative strength line was telling a very different story.

Sideways Price, Weakening Internals

From point A to point B, QQQ price moved sideways. If you were focused solely on price action, you might have concluded that the market was simply digesting recent gains or pausing before another move higher. There was no obvious breakdown, no aggressive selling, and no sense of urgency.

However, the relative strength line was trending lower the entire time.

That’s the key. While price appeared stable, QQQ was quietly underperforming SPY. Capital was rotating away from QQQ, even though price hadn’t yet reflected that weakness. This is exactly why I rely so heavily on relative strength, it reveals what price alone hides.

The Early Warning at Point B

By the time we reached point B, the message became even clearer. The relative strength line had already broken to new lows, signaling confirmed relative weakness. This breakdown happened before QQQ itself broke support.

That’s the beauty of relative strength analysis: it often acts as a leading indicator. It doesn’t wait for the obvious breakdown. It alerts you while price is still lulling traders into a false sense of security.

If you were watching only price, there was no clear reason to expect trouble. But if you were watching relative strength, the warning signs were already flashing.

Price Finally Catches Up

Once support finally broke, QQQ did exactly what the relative strength line had been hinting at all along. The ETF trended lower yesterday and continued lower into today, confirming the earlier signal. What looked like harmless consolidation turned out to be distribution.

This is a textbook example of why I say that looking at price alone isn’t enough. Relative strength adds critical context. It tells you where money is flowing and more importantly, where it’s leaving.

Final Thoughts

This was just a great, clean example of relative weakness in action. Sideways price, deteriorating relative strength, an early breakdown in the ratio, and then price following lower shortly after. When you learn to trust what relative strength is telling you, you stop reacting late and start positioning early.

For more analysis and market insights, visit my homepage