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Writer's picturePeet Serfontein

Understanding Relative Rotational Graph (RRG) in Share Trading

Introduction

In the world of equity market analysis, traders and investors often seek to identify promising investment opportunities by evaluating the performance of various shares. One valuable tool that aids in this analysis is the Relative Rotational Graph (RRG). RRG is a graphical representation that helps investors understand the relative strength and momentum of different shares within a given market or sector.


What is a Relative Rotational Graph (RRG)?

A Relative Rotational Graph is a visual representation of the relative performance of shares in comparison to a benchmark index or a specific group of shares. The graph plots individual shares as data points and illustrates their movement over time, relative to the benchmark. The positioning of each share on the graph provides crucial insights into its relative strength, momentum, and potential investment opportunities.


How RRG Works: The Four Quadrants

The RRG chart is divided into four quadrants, each representing different stages of relative performance:

  1. Leading (Leading Quadrant): Shares in this quadrant are exhibiting strong relative strength and positive momentum compared to the benchmark. They are outperforming the broader market or sector and are considered leaders in terms of price performance. These shares are regarded as potential Profit takes or Holds candidates.

  2. Weakening (Weakening Quadrant): Shares in this quadrant are experiencing a decline in relative strength compared to the benchmark. While they might still be in an uptrend, their momentum is slowing down, and they may be losing some of their leadership positions. These shares are classified as potential Deteriorating candidates or short-selling.

  3. Lagging (Lagging Quadrant): Shares in this quadrant are underperforming the benchmark. They are experiencing weak relative strength and may be struggling compared to other shares or the broader market. These shares are classified as potential Avoid candidates.

  4. Improving (Improving Quadrant): Shares in this quadrant are showing signs of improvement in relative strength, indicating that they are gaining momentum and starting to outperform the benchmark. These shares are considered as potential Buy candidates.


Interpreting RRG for Investment Insights

When analysing a Relative Rotational Graph, traders and investors can draw several meaningful conclusions:

  1. Identifying Leaders and Laggards: RRG helps investors quickly identify which shares are leading the market's upward trends and which are lagging behind. Leading shares in the Leading Quadrant might be attractive investment candidates, while those in the Lagging Quadrant could warrant closer examination to understand potential weaknesses.

  2. Spotting Trend Reversals: A changing position of a share on the RRG can signal a potential trend reversal. For example, a share moving from the Weakening Quadrant to the Improving Quadrant may indicate a shift in momentum and an upcoming upward trend.

  3. Diversification Insights: RRG can assist in portfolio diversification by highlighting shares that exhibit a low correlation with the benchmark. Adding shares with diverse movement patterns can help reduce overall portfolio risk.

  4. Monitoring Sector Rotations: RRG is especially useful for sector rotation strategies, where investors rotate their investments based on the relative strength of sectors. It helps identify which sectors are currently leading or lagging in the market.


Limitations of RRG

While RRG is a valuable tool, it is essential to recognize its limitations:

  1. Historical Performance: RRG is based on past price data and may not always predict future movements accurately.

  2. Not a Standalone Indicator: RRG should be used in conjunction with other technical and fundamental analysis tools for comprehensive decision-making.

  3. Volatility Impact: Highly volatile shares may exhibit erratic movements on the RRG, making interpretation challenging.


Conclusion

Relative Rotational Graphs provide traders and investors with a powerful visual representation of the relative performance of shares compared to a benchmark index or a group of shares. By understanding the quadrants and interpreting the movements of individual shares, investors can gain valuable insights into market trends, identify potential investment opportunities, and optimise their portfolio allocations. As with any investment analysis tool, it should be used alongside other methods and within the context of a well-thought-out investment strategy.


Top 40 Share constituent RRG chart:

The output displayed below compares the individual constituents of the JSE Top 40 index against the index itself. This output undergoes daily updates, and to enhance clarity, various colour backgrounds are utilised for ease of reference.

  1. Leading (Leading Quadrant): Green background. These shares are regarded as potential Profit takes or Hold candidates.

  2. Weakening (Weakening Quadrant): Yellow background. These shares are classified as potential Deteriorating candidates or short-selling.

  3. Lagging (Lagging Quadrant): Red background. These shares are classified as potential Avoid candidates.

  4. Improving (Improving Quadrant): Blue background. These shares are considered potential Buy candidates.


Assign ranking numbers to each share based on the overall RRG strength. The ranking of each share within a quadrant reflects the top selections.


 Leading quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

40 WHL 2.968158 1.394233 Leading Leading

34 SBK 2.296839 1.456861 Leading Improving

21 INP 2.282641 2.982659 Leading Weakening

31 PRX 1.746902 1.040354 Leading Leading

15 FSR 1.615931 1.086213 Leading Leading

24 MRP 1.408494 0.805577 Leading Leading

11 CLS 1.374972 0.807577 Leading Weakening

28 NPN 1.298141 2.620911 Leading Leading

1 AGL 1.256663 51.292101 Leading Leading

9 BVT 1.237251 0.960529 Leading Leading

8 BTI 1.005861 0.038118 Leading Lagging


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

7 BID 0.696101 2.640720 Weakening Leading

32 REM 0.581533 1.427273 Weakening Weakening

22 MCG 0.396085 7.052757 Weakening Weakening

18 GRT -0.102507 1.105422 Weakening Weakening

3 ANG -0.181211 1.130725 Weakening Weakening

29 NRP -0.659811 2.989521 Weakening Weakening


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

12 CPI 0.939518 -0.118376 Lagging Weakening

36 SLM 0.805486 -1.305917 Lagging Improving

13 DSY 0.694853 -2.910818 Lagging Lagging

19 IMP 0.686410 -2.266939 Lagging Improving

5 APN 0.654247 -6.394666 Lagging Improving

10 CFR 0.642479 -2.086108 Lagging Improving

17 GLN 0.579505 -0.173815 Lagging Lagging

37 SOL 0.562135 -2.434435 Lagging Lagging

14 EXX 0.393518 -1.276476 Lagging Lagging

6 BHG -0.127553 -1.472103 Lagging Lagging

23 MNP -0.219561 -2.713100 Lagging Lagging

33 RNI -0.769388 -1.076867 Lagging Lagging

16 GFI -1.769893 -0.443737 Lagging Lagging


Improving quadrant

Ranking   Share RS MOM

2 AMS 3.050698 -0.561068 Improving Improving

38 SSW 2.111528 -0.532133 Improving Improving

20 INL 2.031568 -28.492180 Improving Weakening

25 MTN 1.985938 -1.972519 Improving Improving

0 ABG 1.837361 -1.550243 Improving Improving

27 NPH 1.785470 -0.517930 Improving Improving

39 VOD 1.495715 -0.822666 Improving Weakening

4 ANH 1.363046 -1.878510 Improving Improving

35 SHP 1.329113 -1.111617 Improving Lagging

30 OMU 1.156227 -3.978359 Improving Improving

26 NED 1.070180 -1.449847 Improving Lagging


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

20 INL 10.655385 -170.021246

21 INP 10.322609 16.512691

29 NRP 9.253732 -28.634199

34 SBK 8.524359 14.168605

35 SHP 6.985010 0.329756


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

25 MTN 6.627564 41.563803

5 APN -3.844789 36.423586

22 MCG 3.171269 24.486440

21 INP 10.322609 16.512691

34 SBK 8.524359 14.168605


Changes in Quadrants:

Ticker Quadrant_Change

5 APN Improving to Lagging

7 BID Leading to Weakening

8 BTI Lagging to Leading

10 CFR Improving to Lagging

11 CLS Weakening to Leading

12 CPI Weakening to Lagging

19 IMP Improving to Lagging

20 INL Weakening to Improving

21 INP Weakening to Leading

26 NED Lagging to Improving

34 SBK Improving to Leading

35 SHP Lagging to Improving

36 SLM Improving to Lagging

39 VOD Weakening to Improving






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