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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 2.332904 1.055325 Leading Leading

31 PRX 1.908498 0.409476 Leading Leading

28 NPN 1.736604 3.643511 Leading Leading

15 FSR 1.683032 0.186601 Leading Leading

34 SBK 1.634635 0.474631 Leading Leading

24 MRP 1.630694 0.573601 Leading Leading

36 SLM 1.623791 1.187261 Leading Leading

9 BVT 1.533944 1.488583 Leading Leading

32 REM 1.237496 1.708533 Leading Weakening

7 BID 1.228766 2.137081 Leading Leading

39 VOD 1.117069 0.298690 Leading Weakening

1 AGL 1.035986 0.373633 Leading Leading


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

21 INP 0.976644 0.296114 Weakening Weakening

11 CLS 0.975797 1.538213 Weakening Weakening

18 GRT 0.548430 2.021545 Weakening Weakening

3 ANG 0.522399 1.587284 Weakening Weakening

17 GLN 0.196891 0.233089 Weakening Weakening

22 MCG 0.110447 3.854331 Weakening Weakening

29 NRP -0.982065 3.233808 Weakening Weakening


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

13 DSY 0.983511 -2.952711 Lagging Lagging

4 ANH 0.940823 -1.884029 Lagging Improving

20 INL 0.814720 -1.997923 Lagging Lagging

10 CFR 0.722177 -1.924893 Lagging Lagging

5 APN 0.708744 -6.588508 Lagging Lagging

8 BTI 0.362669 -0.344956 Lagging Lagging

6 BHG 0.236485 -0.034218 Lagging Lagging

14 EXX 0.223038 -2.337220 Lagging Lagging

23 MNP -0.168898 -3.329628 Lagging Lagging

33 RNI -0.178715 -1.989321 Lagging Lagging

37 SOL -1.007619 -2.871127 Lagging Lagging

16 GFI -1.739574 -1.389686 Lagging Lagging


Improving quadrant

Ranking   Share RS MOM

2 AMS 3.176352 -0.215231 Improving Improving

19 IMP 2.508654 -1.672400 Improving Improving

38 SSW 2.222796 -1.098216 Improving Improving

27 NPH 1.729527 -0.347621 Improving Leading

0 ABG 1.483425 -0.555488 Improving Improving

30 OMU 1.306396 -4.110947 Improving Improving

12 CPI 1.114695 -0.610396 Improving Lagging

26 NED 1.084249 -0.437758 Improving Lagging

35 SHP 1.067516 -0.993270 Improving Lagging

25 MTN 1.057090 -7.311055 Improving Lagging


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

33 RNI 3.187251 -4.901694

32 REM 3.065327 5.862538

36 SLM 2.209369 -3.051243

18 GRT 1.962848 5.269994

39 VOD 1.889027 3.864284


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

20 INL 0.963894 13.648584

32 REM 3.065327 5.862538

18 GRT 1.962848 5.269994

0 ABG 1.623324 3.887011

39 VOD 1.889027 3.864284


Changes in Quadrants:

Ticker Quadrant_Change

4 ANH Improving to Lagging

12 CPI Lagging to Improving

25 MTN Lagging to Improving

26 NED Lagging to Improving

27 NPH Leading to Improving

32 REM Weakening to Leading

35 SHP Lagging to Improving

39 VOD Weakening to Leading






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