Most retail traders work from the bottom up. They find a stock with an interesting chart or a compelling story, study it in isolation, and then decide whether to buy or sell. JC Parets works in the opposite direction. Before looking at any individual stock, he examines what the broad market is doing, what sectors are showing leadership, and what the breadth data is telling him about the underlying health of the trend. The individual stock setup is the last thing he considers, not the first.
This top-down approach, moving from macro to sector to individual security, is not new. It is how many professional portfolio managers and technical analysts structure their process. What Parets has done through his platform All Star Charts and his writing is make the framework accessible and explicit for retail traders who typically have no exposure to how institutional technical analysis is actually conducted. His emphasis on intermarket relationships, relative strength, and breadth indicators addresses gaps that most chart-focused education leaves unfilled.
Parets holds the Chartered Market Technician designation and has worked in the markets for over twenty years. His research has been used by hedge fund managers and professional analysts, and he has appeared on major financial media outlets including Bloomberg and CNBC. This article looks at what his analytical framework actually contains, why relative strength and breadth matter for breakout traders, and where his approach is most and least applicable to retail trading decisions.
The Top-Down Framework: Why It Changes the Entry Decision
The practical value of a top-down approach becomes clear when you consider what it prevents. A trader who identifies a technically strong stock setup without checking the broader market context may be buying a breakout in a sector that is actually under distribution, in a market where breadth is already narrowing. The individual chart looks fine. The context is unfavourable. The trade may still work, but the probability structure is different from what it would be if the stock were breaking out in a sector with strong momentum and a broad market with expanding participation.
Parets’s process starts with the overall market trend. Is the S&P 500 in an uptrend? Are global equity markets confirming, or are they diverging? Then he moves to sectors: which are showing relative strength against the broad market, and which are lagging? Only within the sectors showing genuine leadership does he look for individual stock setups. The logic is that a breakout in a leading sector during a confirmed broad market uptrend has a different probability of follow-through than a breakout in a lagging sector during a deteriorating market environment.
For chart traders, this framework changes the stop-loss and position-sizing decision as much as the entry decision. In a confirmed uptrend with strong breadth and sector leadership, there is more justification for holding a position through a normal pullback, because the macro context supports continuation. In a market where breadth is narrowing and leading sectors are beginning to distribute, even a technically clean breakout deserves a tighter stop and a smaller position, because the macro environment is no longer supportive.
Relative Strength: What It Actually Measures
When Parets discusses relative strength, he is typically referring to price performance of one asset relative to another, rather than the RSI oscillator that many newer traders first encounter under that name. Plotting a stock’s price relative to the S&P 500 Index, or a sector relative to the broad market, shows whether it is outperforming or underperforming its reference group. A stock that is rising while the market is also rising is not necessarily showing relative strength. A stock that is rising faster than the market, or holding up while the market declines, is showing genuine relative strength.
The practical implication is that relative strength is often a better selection criterion than absolute price strength. A stock at an all-time high in an up-trending market is not unusual. A stock at an all-time high in a weak or declining market is showing something specific about its underlying demand. That kind of relative performance tends to be persistent. The stocks and sectors showing the best relative strength during a period of broader market weakness are often the first to break out cleanly when the market recovers, because the institutional demand that supported them during the weakness is still present.
The sector rotation and relative strength framework that Parets uses translates directly into stock selection for breakout traders. Screens that filter for stocks at multi-week or multi-month highs while the broader market is below its recent high identify exactly the kind of relative strength that tends to precede meaningful breakouts. The RSI applied at longer timeframes, such as weekly or monthly, can also serve as a proxy for relative momentum, helping identify when a stock has sustained its upward pressure relative to its own history even if the market has been weak.
Market Breadth and What It Tells You About Trend Health
One of the more specific contributions in Parets’s analytical framework is the emphasis on breadth indicators as a measure of trend sustainability. A bull market in which the vast majority of stocks are participating is a different environment from a bull market where the index is rising because a handful of very large companies are doing exceptionally well while most other stocks are flat or declining. The first is a broad, healthy trend. The second is a concentrated trend that is more vulnerable to reversal when the few leaders begin to fade.
The advance-decline line is one of the simplest breadth indicators. It tracks the cumulative difference between advancing and declining stocks each session. When the broad market index is making new highs while the advance-decline line is diverging, not making corresponding new highs, that divergence has historically preceded periods of market weakness. Parets watches these kinds of divergences as an early warning that the apparent strength in the index is not being confirmed by the broad participation that characterises sustainable uptrends.
The McClellan Oscillator is another breadth tool with direct applications in the Parets-style framework. It measures the rate of change in the advance-decline data over a short period, giving a more sensitive reading of whether breadth is improving or deteriorating in real time. A McClellan Oscillator that is declining while the index is rising is an early warning of the kind of internal deterioration that often precedes a correction. These are not prediction tools. They are risk-management tools. They change how a trader should size positions and where stops should be placed based on the health of the underlying trend.
The Intermarket Dimension: Bonds, Commodities, and Currencies
Parets’s analytical process extends beyond equity markets to intermarket relationships. Bond yields, commodity prices, and currency movements all carry information about the macro environment that affects different equity sectors in different ways. Rising interest rates historically benefit financials while pressuring utilities and dividend-focused sectors. Rising commodity prices affect energy and materials companies differently from technology or consumer discretionary. Currency movements shape the earnings environment for multinational companies in ways that do not always show up immediately in stock charts.
The practical application for a retail equity trader is not to become an expert in all these markets but to develop awareness of the macro context that the intermarket data describes. When bond yields are rising sharply, which sectors historically hold up better and which come under pressure? When the dollar is strengthening, which earnings are likely to be revised lower? When commodity prices are in a sustained uptrend, what sectors benefit from that input cost and which are harmed? This kind of intermarket awareness helps a trader avoid concentrating in sectors that are facing macro headwinds even if their individual charts look technically sound.
The put-call ratio is one of the sentiment indicators Parets incorporates for market timing within this broader framework. Extreme readings in the put-call ratio, whether showing excessive fear or excessive complacency, have historically been associated with near-term turning points in the broad market. Used alongside breadth data and intermarket relationships, these sentiment readings help calibrate the risk environment rather than acting as standalone trading signals.
What Breakout Traders Specifically Can Use
For traders whose primary focus is individual stock breakouts, Parets’s framework provides useful structure for two specific decisions: which breakouts to prioritise and how aggressively to trade the current environment. On stock selection, the top-down filter reduces the universe from all technically interesting breakouts to breakouts occurring in leading sectors within a favourable broad market environment. That filtering step tends to improve the base rate of breakout follow-through without requiring any additional technical analysis on the individual chart.
On position sizing and trade aggression, the breadth and intermarket data helps calibrate how much risk to take in the current environment. In a market where breadth is strong, sectors are showing clean rotation, and intermarket relationships confirm a risk-on environment, it is appropriate to take positions with more conviction and to hold them through normal pullbacks. In a market where breadth is deteriorating, sector rotation is confused or absent, and intermarket relationships are sending mixed signals, the same breakout setup justifies a smaller position and a tighter stop.
The volume confirmation on breakout candles remains central to Parets’s approach at the individual stock level. He looks for tight basing patterns, where price has been consolidating in a narrow range, combined with volume expansion at the point where the stock breaks above the consolidation. The tighter the base relative to prior volatility, the more significant the volume expansion at the breakout. This is the same logic that Morales and Kacher apply in a CANSLIM context, without the mandatory fundamental filter.
The CMT Framework and What It Adds
Parets holds the Chartered Market Technician designation, which represents a structured curriculum in technical analysis covering price action, indicators, market structure, intermarket analysis, and risk management. The CMT is relevant not as a credential for its own sake but because it represents a systematic approach to learning technical analysis that goes considerably beyond studying a few popular indicators. The curriculum requires understanding why indicators behave as they do mathematically, what conditions they are designed for, and where they fail.
One practical effect of that training is that Parets tends to use indicators as confirmation tools rather than primary signals. He is looking for price action to show him what the market is doing, and he is using breadth data, relative strength comparisons, and occasionally momentum indicators to confirm or question what the price is already suggesting. That approach is structurally different from using an oscillator as a standalone buy or sell signal, which tends to produce too many false entries in trending markets and misses significant moves entirely in strongly trending conditions.
For retail traders, the CMT framework that Parets embodies implies a certain approach to indicator selection. Before adding an indicator to a chart, understand what it measures, what market condition it was designed to identify, and how it behaves in trending versus range-bound environments. The Chande Trend Meter is one example of a composite indicator that tries to summarise the trend environment across multiple timeframes, reducing the number of individual indicators a trader needs to interpret separately. Used alongside the breadth and relative strength tools Parets emphasises, it can help maintain awareness of the current market regime.
Where the Approach Has Limits for Retail Traders
Parets’s research is produced primarily for professional subscribers and hedge fund clients who are running diversified portfolios across many positions and market segments. The intermarket and breadth framework he uses is most fully applicable when managing a diversified portfolio rather than a small account concentrated in a few individual trades. A retail trader with five to ten positions cannot fully replicate the top-down process in the same way that a portfolio manager overseeing a hundred positions can, because the individual position weighting decisions interact with sector and macro risk in ways that are harder to manage at small scale.
The sheer volume of information that Parets monitors, covering US equities across all sectors, international equity markets, bonds, currencies, and commodities, is also more than most retail traders can realistically maintain. The useful adaptation is not to try to replicate the full scope of his monitoring but to extract the most relevant pieces for the specific markets and timeframes a retail trader is actually trading. For a US equity swing trader, the key inputs are probably the broad market trend, the relative strength of the relevant sector, and whether market breadth is expanding or contracting. International currency and bond analysis can be added as a secondary layer without requiring the same depth of analysis that Parets provides professionally.
There is also the question of how much any top-down framework can tell you about timing individual entries. Parets’s framework is excellent for establishing context and improving stock selection. It does not eliminate the need for specific entry timing decisions at the individual chart level, and it does not guarantee that a technically sound breakout in a favourable macro environment will immediately move in the expected direction. The context improves odds. It does not remove uncertainty.
The Practical Summary
JC Parets’s most useful contribution for retail traders is not any specific indicator or chart pattern. It is the habit of thinking about market context before acting on individual signals. A breakout in a leading sector during a broad market uptrend with expanding breadth is a structurally different trade from a breakout in a lagging sector with narrowing breadth. Both may produce the same individual chart pattern. They do not have the same probability of sustained follow-through.
The relative strength lesson is specific: prioritise stocks that are outperforming the broad market and their sector peers, not just stocks that are rising in absolute terms. The breadth lesson is equally specific: when the advance-decline line and related breadth indicators diverge from the index, the index is telling you less than usual about the underlying health of the trend. These two inputs together change the risk framework for every individual trade taken within that environment.
His approach to intermarket analysis is the layer that takes longer to develop but improves the quality of macro context significantly. Understanding how bond yields, currencies, and commodity trends affect different equity sectors helps a trader avoid concentrating in areas where the macro environment is working against the trade, even when the individual chart looks clean. That kind of structural awareness is what separates reactive trading from genuinely informed position-taking, and it is the core of what Parets has spent two decades developing and teaching.
Recommended Books about JC Parets principles
The following books may help you study the trading styles, market context, psychology, risk management, and methods associated with well-known traders and investors.
Disclosure: As an Amazon Associate, I earn from qualifying purchases.
- Technical Analysis Using Multiple Timeframes by Brian Shannon
This book is relevant for readers studying modern chart-based analysis and multi-timeframe market structure.
- Technical Analysis of the Financial Markets by John Murphy
This book is a core technical-analysis reference and is useful background for readers following chart-based market commentary.
- Intermarket Analysis by John Murphy
This book is relevant for understanding cross-asset relationships, sector rotation, bonds, commodities, currencies, and equities.
Disclaimer: Educational content only. Not investment advice. Trading involves risk. You are responsible for your decisions.