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## Formula 201 – #17 Relative Price Indicator

Relative Price indicator is an example indicator demonstrating one of the less known technical analysis techniques called Relative Price Analysis.

I will explain what Relative Price Analysis is with several examples.

What is Relative Price Analysis?

Relative Price Analysis is the study of the value of a financial instrument relative to another financial instrument.

A common usage of this analysis is to look at the ratio between a stock and its sector index to determine if the stock is relatively stronger or weaker to the overall performance of its industry.

Another usage of this concept is to study the relative valuation of a financial instrument based on a reference instrument that is deemed to have better objective value. For example, many people likes to chart various stock market indices relative to the price of gold.

There are 2 standard ways to determine the relative value – Ratio method and Percent Change method.

The Ratio Method

Ratio method simply divide the instrument of interest by the reference instrument. The resulting data series is an abstract series that is good for normal chart pattern comparison, potential divergence identifications, etc.

The Percent Change Method

Percent Change method requires a starting date as the reference valuation point. From this point onward, the percentage change from the reference value is applied to the instrument of interest.

Example 1

Here is an example showing the Dow Jones Industrial Average relative price based on the Philadelphia Gold/Silver Sector Index (XAU). By setting the starting date to Jan 1, 2008, and the scaling method to Percent Change, I am able to review the index from a very different perspective. Example 2

This example shows the S&P 500 index relative price based on the US 30 Year Treasury Yield index using the Percent Change method. Example 3

Using the Ratio method, the relative price indicator simply shows the ratio between S&P 500 index and the Nasdaq 100 index. In this example, the indicator is changed to plot the close line only as oppose to showing meta bars. 