Relational Technical Analysis: A New Way to Look at Charts

Relational Technical Analysis: A New Way to Look at Charts

S&P 500 SP:SPX


Relational Technical Analysis™ or “Relational Analysis” is my contribution to the continuing evolution of technical analysis. It helps me understand who is in control of the price action of stocks, indexes, ETFs and more. It can provide a leading analysis for trading or investing in any chartable trading instrument, even cryptocurrencies.

Relational Technical Analysis starts with an understanding of the current market participant cycle. There are 2 sides of the market participant cycle, each with a few different groups: the Professional Side and the Retail Side.

The Professional-Side Groups:

  • the Buy-Side Institutions, which I often refer to as “the Dark Pools”
  • the Sell-Side Institutions, which include the Money Central Banks and largest Financial Services Companies
  • the Professional Traders, both independent and Floor traders for either the Buy Side or Sell Side
  • the High Frequency Trading Firms, aka HFTs

The Retail-Side groups:

  • Smaller Funds with less than $3 billion under management
  • the Retail Groups: small lots and odd lots

At any given time, one or two of these groups will dominate the price, trend and direction of an asset. Relational Technical Analysis reveals which of the market participant groups is in control. This is due to the differences between the way each group trades–how they execute trades, their reasons for buying and selling, their access to information, where in the trend they tend to buy and sell, and more.

For example, there are huge differences between the order types and speed of execution of each market participant group:

  • Order Types: The Professional side uses unique orders to their trading venues such as Time Weighted Average Price (TWAP) strategies for automated orders and multi-leg cross-market orders. Retail uses Market and Limit orders; Small Funds often use Volume Weighted Average Price ( VWAP ) strategies to trigger automated orders.
  • Speed of Execution: The Professional-Side short-term traders trade on the second. HFTs trade on the millisecond. Retail orders must be filled within 1 minute. Dark Pool transactions can take up to 10 minutes or longer to fill huge, large-lot orders, based on the SEC Midas data analysis.

Additional variables include Lot Size, Time of Day trades are transacted and Venue (whether on the public exchanges or on Alternative Transaction Systems like Dark Pools).

These variables create very different patterns in candlesticks and indicators. Analyzing charts relationally, then, gives the trader an understanding of how price is most likely to behave in the near term. When the Professional Side is in control, the trend is typically more sustainable.

Relational Technical Analysis uses a combination of the price and volume patterns created by each market participant group along with hybrid indicators that reveal the balance of power. The example below uses Chaikin Oscillator. A Volume Oscillator is always included in the set of 5 indicators I teach, a set which differs depending on which indicators you have available.

On the SPX, we can see the shift of sentiment that occurred between October and January as the Dark Pools sold against the Small Funds.

In October and November of 2021, there was extreme speculation from the Small Funds. The steep run up occurred on low volume and an extreme angle of ascent in Chaikin Oscillator .

This was followed by a pattern that represents Dark Pool rotation. A trading range develops with stronger selling volume while Chaikin Oscillator moves down and stays at and below the center line over the topping pattern development. This rotation zone is confirmed in the months following, as Dark Pool TWAPs continue. The largest institutions were lowering their inventory of S&P500 components ahead of the downtrend.

Relational Technical Analysis: A New Way to Look at Charts - 2023

This Relational Technical Analysis showed a Shift of Sentiment in the market that was a crucial leading indication of the risk of a significant downside trend developing. Traders using this analysis had ample time to prepare for the downtrend which resulted in a Bear Market decline this year.

Thinking ahead from here, I’m looking for the opposite as a bottom starts developing: a shift of sentiment back to the upside where Retail and Small Funds capitulate, followed by Dark Pool accumulation patterns.

In summary, Relational Technical Analysis is a new way of looking at the charts which focuses on the unique candlestick patterns, trend formations and indicator patterns that each market participant group creates. This can provide a leading analysis for all trading styles.

Martha Stokes, CMT

This has been an introduction to Relational Technical Analysis , which I teach at TechniTrader and which I presented to the CMT Association in 2015.

Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.