RRG Charts

Using RRG to find some good and some not so good names inside the DJ Industrials index.

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The relative rotation graph above shows the rotation of the 30 DJ Industrials stocks. Watching the interaction on the canvas, a few rotations catch the eye.

Inside the lagging quadrant IBM, HD, and DWDP are clearly moving deeper into negative territory. On the opposite side inside the leading quadrant, we find MCD, WBA, PG, and WMT at strong RG headings moving higher on both axes.

In the weakening quadrant, the most pronounced rotations are visible for Nike and Apple. Both stocks have gone through a strong rotation and are now rapidly losing relative momentum and heading towards the lagging quadrant.

Although the trail of INTC inside the improving quadrant is showing improvement it is still the weakest stock in this universe based on the RS ratio. Therefore the risk of a rotation back towards the lagging quadrant remains a realistic scenario.



Summary

  • MCD, WBA, KO, PG are solid holds inside the leading quadrant.
  • DIS, VZ, and MRK just entered the leading quadrant again after a rotation through weakening
  • UNH is curling back up and continues to be one of the stronger stocks in the DJ Industrials
  • GS is rolling breaking important support levels and rolling over inside the improving quadrant
  • HD is deep inside the lagging quadrant and a break below support at $170 will fuel an acceleration lower
  • NKE is ready to cross over into the lagging quadrant

The strong names

This RRG above zooms in on the names inside the leading quadrant, Some of these stocks, MCD, WBA, KO, and PG are well underway inside this leading quadrant while showing long tails. These are solid positions to hold but probably a bit late to add or initiate.

Stocks that are showing some potentially interesting rotations, at least from a relative perspective, are the ones that have just returned to the leading quadrant from weakening without crossing over to the left-hand side of the chart. These are DIS, VZ, and MRK. And to a lesser degree UNH as this one is still inside the weakening quadrant but starting to make its way back up again.

VZ and MRK have also rallied significantly over the past weeks potentially making them vulnerable from a price perspective.

DIS has been commented on recently by a number of authors here on the site (Greg Schnell, Arthur Hill) and yours truly. So there is no need to re-do that work!

This leaves us with UNH.

Unitedhealth Group, Inc - UNH

UNH is a perfect example of a solid uptrend. After a sideways period during almost all of 2015, this stock started to move higher at the beginning of 2016 in a very regular pattern of higher highs followed by higher lows.

From late 2016 onwards the relative strength line is following a similar pattern in a very regular rhythm of higher highs and higher lows. This relative trend translates into a Jdk RS-Ratio line that moved above 100 at the end of October 2016 and has remained above that level ever since. The RS momentum line has been oscillating back and forth around 100 a few times which caused the rotations from leading to weakening and then back to leaving again. 

The most recent break to new highs in price as well as relative strength is underscoring the strength of UNH and the sector.

The not so strong names

On the weak side of the RRG, we find a few important stocks that are showing not such strong rotations.

Inside the improving quadrant or just back into lagging we see MMM, GS, and CAT that all turned back down after rotating from lagging to improving. These stocks are entering a new down-leg within their existing relative downtrends.

Out of these three, I want to take a closer look at the GS chart as it seems to be breaking important levels.

Well inside the lagging quadrant we find IBM, DWDP, and HD. All three are heading lower on both axes of the RRG and their long(er) tails suggest that there is still enough power behind those moves to keep them going in that direction.

I am taking a closer look at HD.

Inside the weakening quadrant, NKE is rapidly heading towards lagging and seems poised to crossover soon.

Goldman Sachs Group Inc, - GS

The relative strength chart of GS against $INDU is moving lower already since the beginning of 2017. After an eight-month sideways period this downtrend accelerated again at the beginning of this year and just now GS, once again, seems to be breaking below a previous low in RS.

The RS-Ratio line was, and still is, already well below 100 and the recent uptick in RS-Momentum was nowhere near able to bring RS-Ratio back up towards 100. With RS-Momentum now curling back down again, causing the tail on the RRG to roll over, a new leg down on relative strength is expected for GS.

The break below horizontal support on the price chart will only confirm and fuel a new period of weak relative strength for the bank that "does God's work"  

Home Depot, Inc. - HD

HD ended its uptrend in price at the beginning of October when it dropped below its rising support line. The drop after this break ended at support near $ 170, the level of the previous major low. The recovery rally that emerged out of this low is now finding resistance near the old support line and seems to be putting in a new, lower, low.

A break below $ 170 will seriously harm this chart even further and open up the way for more downside price action.

A similar pattern is visible in the RS chart where HD also broke a rising support line and bounced back up from horizontal support. A combined break of both the price and relative support levels will send the RRG-Lines lower and push HD deeper into the lagging quadrant.

Nike Inc. - NKE

Nike is still at the right side of the Relative Rotation Graph but quite frankly, the question is "for how long?"

The break in the price chart is clear and the fact that the recovery rally did not manage to reach back to the old support line indicates weakness (sellers were happy to come back to the market at lower prices than previously).

$70 is the (horizontal) support level to watch. A break will open up the way to the area near $65.

From a relative perspective, the uptrend is now broken and a first lower high is visible. A break below the recent low in RS will confirm that a new relative downtrend is underway which will push both RRG-Lines lower and eventually into the lagging quadrant.

Downside risk for NKE is a lot bigger than its upside potential.


Let me know what you think of this usage of RRG in the comments below. If you would like to receive a notification when a new RRG blog article is published, simply "Subscribe" with your email address using the form below.

 

Julius de Kempenaer | RRG Research
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered TradeMarks ®; of RRG Research

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Julius de Kempenaer
About the author: is the creator of Relative Rotation Graphs. This unique method to visualize relative strength within a universe of securities was first launched on Bloomberg professional services terminals in January 2011 and was released on StockCharts.com in July 2014. A graduate of the Dutch Royal Military Academy and former captain in the Dutch Air Force, Julius first began his career in the financial industry in 1990 as a portfolio manager. He is now the director/owner of RRG Research in Amsterdam. Learn More
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