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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 4.337230 1.717703 Leading Leading

34 SBK 4.109568 2.289520 Leading Leading

28 NPN 3.979236 5.497766 Leading Leading

24 MRP 3.954841 2.333622 Leading Leading

0 ABG 3.897320 1.806114 Leading Improving

31 PRX 3.897289 3.543514 Leading Leading

12 CPI 3.670718 0.957242 Leading Lagging

11 CLS 3.328279 3.425957 Leading Weakening

32 REM 3.278516 3.429020 Leading Weakening

36 SLM 3.152289 2.744499 Leading Leading

35 SHP 3.073760 0.273121 Leading Lagging

15 FSR 2.747305 0.984329 Leading Leading

18 GRT 2.598653 6.966062 Leading Weakening

21 INP 2.580581 2.375701 Leading Weakening

9 BVT 2.461295 2.219974 Leading Leading

20 INL 2.130789 0.190298 Leading Lagging

39 VOD 1.982006 1.204765 Leading Weakening


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

7 BID 0.866618 5.231913 Weakening Leading

8 BTI -0.127675 0.259722 Weakening Lagging

22 MCG -0.183295 3.431824 Weakening Weakening

29 NRP -0.233376 6.287310 Weakening Weakening

17 GLN -2.380286 7.070451 Weakening Weakening

6 BHG -2.596632 8.117066 Weakening Lagging


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

25 MTN 0.349105 -7.867995 Lagging Lagging

4 ANH -0.479315 -4.095899 Lagging Improving

23 MNP -0.549040 -5.055716 Lagging Lagging

2 AMS -1.351263 -1.329076 Lagging Improving

1 AGL -2.196067 -2.939005 Lagging Leading

3 ANG -2.876579 -37.333805 Lagging Weakening

14 EXX -3.463950 -7.723676 Lagging Lagging

19 IMP -4.737839 -4.614971 Lagging Improving

16 GFI -5.435639 -16.082659 Lagging Lagging

38 SSW -5.979055 -38.841775 Lagging Improving

37 SOL -6.477772 -6.442219 Lagging Lagging

27 NPH -7.398311 -4.269047 Lagging Leading


Improving quadrant

Ranking   Share RS MOM

13 DSY 3.631652 -1.521517 Improving Lagging

30 OMU 2.844866 -3.363853 Improving Improving

10 CFR 1.990368 -3.216396 Improving Lagging

33 RNI 1.885780 -6.368233 Improving Lagging

5 APN 1.583244 -7.792305 Improving Lagging

26 NED 1.426886 -0.186696 Improving Lagging


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

12 CPI 19.311773 12.092147

13 DSY 19.299970 11.030851

0 ABG 18.520591 18.056623

34 SBK 18.426577 10.049380

33 RNI 17.638719 -31.175164


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

6 BHG -20.292654 51.255622

17 GLN -18.144176 42.518144

18 GRT 16.314406 34.937096

20 INL 10.176378 26.777910

29 NRP 5.452971 20.103041


Changes in Quadrants:

Ticker Quadrant_Change

0 ABG Improving to Leading

1 AGL Leading to Lagging

2 AMS Improving to Lagging

3 ANG Weakening to Lagging

4 ANH Improving to Lagging

5 APN Lagging to Improving

6 BHG Lagging to Weakening

7 BID Leading to Weakening

8 BTI Lagging to Weakening

10 CFR Lagging to Improving

11 CLS Weakening to Leading

12 CPI Lagging to Leading

13 DSY Lagging to Improving

18 GRT Weakening to Leading

19 IMP Improving to Lagging

20 INL Lagging to Leading

21 INP Weakening to Leading

26 NED Lagging to Improving

27 NPH Leading to Lagging

32 REM Weakening to Leading

33 RNI Lagging to Improving

35 SHP Lagging to Leading

38 SSW Improving to Lagging

39 VOD Weakening to Leading






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