The Relative Rotation Graph below plots major world stock market indexes against the Morgan Stanley Capital International (MSCI) world index. On this weekly timeframe, the tail for the Hong Kong index (HSI) on the left-hand side of the chart stands out. HSI has the longest tail, which indicates that there’s a lot of power – what we call momentum – behind the move.
In mid-January, HSI moved from the lagging quadrant into the improving quadrant, but failed to progress to the leading quadrant. Instead, the tail rolled over while still inside the improving quadrant and, a few weeks ago, dropped back into the lagging quadrant.
We know from experience that such moves signal a strong relative trend, albeit a downward trend in this case. What we are seeing is a new downturn in an already declining relative trend.
When we zoom in and look at global indices on a daily timeframe, we find HSI has moved through the leading quadrant into the weakening quadrant. Of course, the daily rotations are much more detailed than the weekly perspective. HSI’s renewed relative weakness, as shown on the above daily RRG, will likely start to put more pressure on the weekly tail too. This means that the two timeframes are getting back in sync, pushing Hong Kong stocks deeper into the lagging quadrant.
The above price chart reveals where those rotations are coming from. HSI has been in a clear downtrend for quite some time, but recently bounced strongly off its 15 March low.
However, the recovery stalled well below the previous support level that one might have expected to act as resistance, just below the 23,000 mark, after closing the gap that was formed at the start of March. The market recently completed a topping formation when it dropped below the lower boundary of that short range. This paved the way for a fresh move lower.
It is possible that HSI will soon re-test that March low at 18,200.
Next, we turn our attention to New York and the group of tech stocks plotted on the weekly RRG below. This chart, which uses the S&P 500 as a benchmark, shows pretty weak rotation in general. Almost all tails are on the weak, left-hand side of the graph, indicating that they are all in relative downtrends.
The two stocks that stand out positively are Tesla [TSLA] and Twitter [TWTR], both of which are represented by blue tails on the graph above. However, when we check out their individual price charts, upside potential appears limited.
One tail worth focusing on here is that of Google’s parent company Alphabet (GOOGL). As this tail is slightly buried under the other tails in the chart, let’s look at GOOGL in isolation, below, to get a better view of what’s going on.
As this chart illustrates, the stock started to travel higher on the JdK RS-Momentum scale 10-12 weeks ago and eventually managed to return to the improving quadrant. However, two weeks ago the direction of the tail performed a sudden U-turn, hooking back down. It is now crossing into the lagging quadrant.
Similar to the HSI tail we focused on earlier, GOOGL has now completed a rotation entirely within the left-hand side of the graph, which is usually a warning sign.
The price chart above shows us where the risk is. After reaching a high of around 3,000 in November last year, GOOGL started to move sideways. Since then, the stock has tested support around the 2,500 level multiple times, making it a solid floor.
The price is once again dropping back towards that support level. A clear break below this level, particularly before a Friday close, would open up fresh downside potential.
Based on the height of the trading range (3,000-2,500 = 500), we can peg a technical target for a possible downward move at around 2,000.
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