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RRG Relative Strength

Relative Rotation Graphs (RRG) is a relative strength indicator that is designed to measure the relative performance (JdK RS-Ratio) and the momentum of relative performance (JdK RS-Momentum) of several securities, sectors, and markets against a common benchmark, and against each other. The strength of this indicator lies in its ability to visually plot the relative performances of multiple securities on a scatter-plot chart and most important, to show the rotation over a time period.


It is visually challenging to depict sector and asset class rotations on linear charts. RRGs tries to simply this task by categorizing securities within four relative performance quadrants and to define the four different stages of a relative trends as securities move from one quadrant to the other. These rotations tend to move in a clockwise fashion typically from the leading quadrant to the weakening quadrant, then to lagging quadrant, and finally back to the improving quadrant. The objective is to help investors and traders differentiate the leaders from the laggards and to track securities that are weakening to those that are improving over a time period.


For instance, the leading quadrant or the top right quadrant consist of securities that have RS-Ratio and RS-Momentum trading above 100. These are the securities that are potential buy candidates. Weakening quadrant are securities with RS-Ratios that are greater than 100 but the RS-Momentums are trading below 100. This quadrant depicts securities that may be undergoing a correction or are starting to show initial signs of a top. Lagging quadrant comprise of securities with both the RS-Ratios and RS-Momentums trading below 100. These are securities that are underperforming their peers and may be potential sell candidates. Improving quadrant are securities with RS-Ratios below 100 but RS-Momentums above 100.


Since RS-momentum tends to move in advance of RS-Ratio, short-term traders tend to anticipate this trend change by selecting the next leaders from this quadrant. Investors, on the other hand, will often wait for securities to move decisively into the leading quadrant before buying since RS-Ratio tends to be more technically reliable than RS-Momentum. Another important note, although securities often progress in a clockwise circular manner, sometimes, they do not always rotate through all four quadrants. The reason is financial markets are driven by investors and as human being they are driven by basic human traits such as fear, greed, hope, and complacency. Also, keep in mind that although relative performance indicators are powerful tools to help traders and investors, there are still risks that the rotations may not confirm to normal tendencies. That is, these rotations may even reverse direction (counter-clockwise) during volatile market conditions. And as with any technical indicator, they should always be used in conjunction with other technical tools to help investors/traders complete the investment picture.


Enclosed are RRGs for various markets including: Asset Allocation, Market Cap/Size, S&P 500 Sectors, and Dow Jones Industrial Average. For traders and investors looking for long positions focus on the securities situated in the leading and improving quadrants. For short positions or sell situations turn to the securities residing in the lagging and weakening quadrants.



Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com





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