If you superimpose two charts of BSEOIL and BSEAUTO together, you will see two similar looking charts with increase and decreasing gaps between them. Just by looking at charts one can attempt to judge outperformance and underperformance of the respective sectors, but it's not easy. This is because Elliott waves can extend, oversold assets can remain oversold or stagnant for a longer time and trendline breaks may not give sustained reversals.

To improve on this ability to judge performance technicians use relative performance. This is a ratio line, which indicates whether the ratio between two assets is rising or falling. A falling ratio is underperformance for the Numerator asset and vice versa.

In the case illustrated here, we have the ratio line between BSEOIL and AUTO. The line was rising from May 2006 till Aug 2008 and then falling since then. Relative ratio line or intermarket analysis has not been considered as a study of oscillators or time cycles. We at Orpheus consider intermarket cyclicality at the soul of intermarket analysis. Isolating seasonality from an intermarket ratio line can be a very effective tool for understanding intermarket performance. Now this can be done in many ways. The basic way to do this is visually.

The last two times the relative line made a low and high was in Mar 2006 and Aug 2008 respectively. In the first case BSEOIL outperformed Auto by 153% and in the second case it was Auto that outperformed Oil by 178%. Now we are reaching another inflexion point. When the relative line turns, the cycle will repeat and Auto will underperform Oil.

BSE Auto has a quarterly momentum non confirmation. This does not make an encouraging case for Auto. The sector remains a potential underperformer for us compared to BSEOIL.

Mukul Pal, CMT, Orpheus Capitals, Global Alternative Research