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Understanding Relative Rotational Graph (RRG) in Share Trading

Writer's picture: Peet SerfonteinPeet Serfontein

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 2.309337 1.223142 Leading Leading

31 PRX 1.859805 1.096785 Leading Leading

28 NPN 1.587751 3.957681 Leading Leading

24 MRP 1.549893 0.679800 Leading Leading

15 FSR 1.445301 0.850027 Leading Leading

9 BVT 1.343324 1.497262 Leading Leading

7 BID 1.286140 2.750244 Leading Leading

1 AGL 1.195934 51.235577 Leading Leading

36 SLM 1.052937 0.201811 Leading Improving


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

21 INP 0.907963 0.427198 Weakening Weakening

11 CLS 0.775805 1.379805 Weakening Weakening

12 CPI 0.730197 0.002305 Weakening Weakening

32 REM 0.705783 1.149958 Weakening Weakening

3 ANG 0.702190 1.383154 Weakening Weakening

18 GRT 0.074711 1.014620 Weakening Weakening

22 MCG 0.048417 4.057463 Weakening Weakening

29 NRP -0.916394 3.031789 Weakening Weakening


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

35 SHP 0.886204 -0.871148 Lagging Lagging

39 VOD 0.856371 -0.040323 Lagging Weakening

10 CFR 0.817034 -1.961498 Lagging Improving

5 APN 0.714832 -6.364765 Lagging Improving

13 DSY 0.703808 -2.916095 Lagging Lagging

20 INL 0.702355 -3.573853 Lagging Weakening

26 NED 0.661314 -1.164324 Lagging Lagging

8 BTI 0.481417 -0.276623 Lagging Lagging

6 BHG 0.447369 -1.122352 Lagging Lagging

14 EXX 0.441978 -1.301575 Lagging Lagging

17 GLN 0.346329 -0.333178 Lagging Lagging

37 SOL 0.235268 -2.650433 Lagging Lagging

23 MNP -0.377011 -2.650584 Lagging Lagging

33 RNI -0.569533 -1.122273 Lagging Lagging

16 GFI -1.469035 -0.779440 Lagging Lagging


Improving quadrant

Ranking   Share RS MOM

2 AMS 3.766478 -0.494247 Improving Improving

19 IMP 3.134139 -1.795721 Improving Improving

38 SSW 2.834269 -0.460666 Improving Improving

27 NPH 2.729286 -0.340336 Improving Improving

0 ABG 1.375591 -0.860968 Improving Improving

34 SBK 1.369629 -0.265161 Improving Improving

30 OMU 1.294951 -4.024884 Improving Improving

25 MTN 1.074690 -8.474823 Improving Improving

4 ANH 1.061871 -2.007086 Improving Improving


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

29 NRP 7.457650 -28.380588

30 OMU 6.144192 1.115172

13 DSY 4.327541 -3.786657

35 SHP 3.884652 1.772566

12 CPI 3.821433 -3.614790


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

5 APN -3.420695 36.602991

33 RNI 3.435368 9.938731

9 BVT 1.464984 7.100002

22 MCG 0.737594 6.514675

36 SLM 0.851291 5.378203


Changes in Quadrants:

Ticker Quadrant_Change

5 APN Improving to Lagging

10 CFR Improving to Lagging

20 INL Weakening to Lagging

36 SLM Improving to Leading

39 VOD Weakening to Lagging






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