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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 2.149448 1.181620 Leading Leading

31 PRX 1.963894 1.148811 Leading Leading

28 NPN 1.716066 4.549947 Leading Leading

1 AGL 1.469665 51.490358 Leading Leading

24 MRP 1.273948 0.925259 Leading Leading

15 FSR 1.242025 0.568653 Leading Leading

21 INP 1.194458 0.959779 Leading Weakening

9 BVT 1.144601 0.491718 Leading Leading

7 BID 1.075472 2.711139 Leading Leading


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

11 CLS 0.814297 1.343044 Weakening Weakening

12 CPI 0.651257 0.047817 Weakening Weakening

3 ANG 0.619957 1.359656 Weakening Weakening

32 REM 0.536587 1.527589 Weakening Weakening

22 MCG 0.062766 4.181087 Weakening Weakening

18 GRT 0.047473 1.028576 Weakening Weakening

29 NRP -0.870255 3.024189 Weakening Weakening


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

36 SLM 0.967505 -0.318727 Lagging Improving

20 INL 0.933893 -7.914429 Lagging Weakening

10 CFR 0.814588 -1.963244 Lagging Improving

37 SOL 0.746849 -2.312374 Lagging Lagging

13 DSY 0.698530 -2.912985 Lagging Lagging

35 SHP 0.686134 -0.762524 Lagging Lagging

8 BTI 0.659203 -0.169927 Lagging Lagging

26 NED 0.617539 -1.133754 Lagging Lagging

6 BHG 0.490050 -1.096387 Lagging Lagging

14 EXX 0.461636 -1.311756 Lagging Lagging

5 APN 0.351682 -6.543993 Lagging Improving

17 GLN 0.187034 -0.442048 Lagging Lagging

23 MNP -0.317875 -2.674064 Lagging Lagging

33 RNI -1.336117 -0.948107 Lagging Lagging

16 GFI -1.551657 -0.687249 Lagging Lagging


Improving quadrant

Ranking   Share RS MOM

2 AMS 4.428617 -0.432434 Improving Improving

19 IMP 2.799110 -1.860218 Improving Improving

38 SSW 2.781759 -0.465858 Improving Improving

27 NPH 2.670256 -0.351443 Improving Improving

4 ANH 1.398881 -1.863212 Improving Improving

0 ABG 1.360110 -0.837860 Improving Improving

34 SBK 1.290331 -0.412433 Improving Improving

25 MTN 1.250113 -7.223072 Improving Improving

30 OMU 1.222739 -4.000665 Improving Improving

39 VOD 1.011264 -0.229860 Improving Weakening


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

29 NRP 7.780625 -28.426193

30 OMU 5.638708 1.260480

13 DSY 4.290595 -3.767998

37 SOL 4.269283 4.263005

23 MNP 3.811093 4.064695


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

5 APN -5.962749 35.527624

33 RNI -1.930721 10.983730

25 MTN 1.476791 10.060483

28 NPN 1.610948 7.273760

22 MCG 0.838038 7.256417


Changes in Quadrants:

Ticker Quadrant_Change

5 APN Improving to Lagging

10 CFR Improving to Lagging

20 INL Weakening to Lagging

21 INP Weakening to Leading

36 SLM Improving to Lagging

39 VOD Weakening to Improving






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