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Using Relative Rotation Graphs to compare assets

The Relative Rotation Graph (RRG) below is a price-based comparison showing the performance of world stock markets. It paints a pretty sobering picture. Hong Kong’s Hang Seng index is in the weakening quadrant, signifying that it is in an uptrend based on price but losing momentum. All other indices are in the red, lagging quadrant, which means they are in downtrends.

With most of the world’s major stock markets heading lower, does that mean that investors and traders should pack up and go home? No. But I wanted to highlight that the dominant direction for world stock markets is lower in terms of price.

However, when you look at RRGs using a relative benchmark, the picture changes. The RRG below shows the same group of indices as the above chart, but plots them against the MSCI world index which is positioned at the chart’s mid-point.

US indices are still located to the left of other markets, as we have seen in recent weeks. But it looks as if things are starting to change a bit. Some of the tails inside the leading quadrant have started to roll over, while the US trio of SPX, NDX and RTY have started to curl upwards.

This is by no means a change in trend, but it is a development that we should monitor. It is too early to say whether this is a real turnaround or a temporary blip.

US vs Australian indices

RRGs can be used to compare pairs of indices. With that in mind, the rotations for Australia’s ASX 200 [AS51] and the Nasdaq 100 [NDX] merit closer inspection. 

AS51 is in the leading quadrant but has started to roll over and lose relative momentum. On the other hand, NDX is in the lagging quadrant on the far-left side of the graph, but is starting to gain relative momentum. 

To spot interesting pairs of indices, I look for tails that are moving in opposite directions – and AS51 and NDX seem to be doing just that, based on the daily chart below.

The weekly price chart below shows that Australia’s ASX 200 recently fell below a broad range, forming a big topping formation. As a result, upside potential now appears limited, while downside risk is clearly there.

The RRG lines at the bottom of the chart give us important information as they are rolling over and heading lower, indicating that relative strength has started to fade.

The weekly price chart for the Nasdaq 100 suggests that this market seems to be touching on a support level. Again, the movement in the RRG lines is where it is becoming interesting. Here, the RRG Lines are starting to turn upward and move higher, implying that the Nasdaq has started to pick up relative strength and momentum.

Tesla vs Alibaba 

We can also use RRGs to compare stocks. Let’s take Tesla [TSLA] and Alibaba [BABA] as an example. 

The below chart of major tech stocks shows that the tails of TSLA and BABA are moving in opposite directions. BABA is in the improving quadrant, but rapidly heading towards leading. Meanwhile, TSLA is in the lagging quadrant and pushing deeper.

The weekly price chart below reveals that TSLA has just completed a big topping formation as it broke below the major low that was set in March. As a result, upside potential is limited to the former breakout level, while downside risk extends towards the former lows in the area around 550, and potentially even lower.

The RRG lines at the bottom of the chart are crucial. Both the RS-Ratio and the RS-Momentum lines are below the 100 level and moving lower, signalling that TSLA has embarked on the next stage of an existing relative downtrend. If this trend continues, the result would be further underperformance for TSLA relative to the S&P 500.

Moving onto Alibaba, the below price chart shows that New York-listed BABA has lost about two-thirds of its value since the peak above 300 in October 2020. The long downtrend now seems to be losing momentum, with BABA recently managing to break above the falling resistance line for the first time in two years.

To be clear, this recent uptick does not signify a confirmed turnaround of the downtrend. Rather, it represents an improvement in relative strength. The rising RRG lines also point to a relative improvement since April.

Finding pairs of rotations on RRGs, such as those discussed above, can help highlight potential opportunities and could form part of an overall trading strategy. 

Pricing is indicative. Past performance is not a reliable indicator of future results.

RRG’s views and findings are their own and should not be relied upon as the basis of a trading or investment decision.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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