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Finding Winners in a Pool of Mud

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At the start of this week in my weekly StockCharts TV show Sector Spotlight, I discussed the re-emerging strength of Consumer Discretionary and Technology stocks.

In the second half of the week, markets started to shift a bit and, as usual, the question is whether this down move, which we have been seeing since Wednesday, is a regular setback within the uptrend or the start of a more meaningful correction?

When you bring up the Relative Rotation Graph for US sectors, not much has changed since the start of this week. RRGs don't get very nervous, very fast as they try to follow "trends" in relative strength - and, as we all know, "trends," in general, don't turn around from one day to another.

Trend following and these type of characteristics can be a blessing or a curse, as you will always be "late" to get either in or out of a move. That's something we just have to live with.

Dave Keller reminded me this week of a famous quote by Peter Lynch:

Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves. - Peter Lynch

So, for now, I am following the long-term uptrend that is still in play and the current sector rotation and I try to step away from a few weak days as long as they don't impact the existing trend. I will update these rotations again in next week's episode of Sector Spotlight.

Just to clarify - the "trend" that I am looking at is the current move out of the March 2020 low.

That channel and the series of higher highs and higher lows is still intact so far. And even if the rising support line gives way, SPY can drop to levels between 340-350 without materially damaging this move.

What *is* slowing down is the relative strength of SPY vs VBINX.

For this article, I want to take a look at the pool of stocks that make up the DJ Industrials index. If you want to use a Relative Rotation Graph to gauge general market direction, you can use a little trick and change the benchmark symbol to $ONE. This means measuring the relative trends against a benchmark that never goes down, or, in other words, measuring absolute trends. What you will see is that, during market uptrends, all stocks will cluster to the right of the benchmark, whereas during market downtrends, most of the stocks will be moving to the left of the benchmark.

When the majority of members of an index are clustering in a certain area of the RRG and/or moving in the same direction, that tells you something about the market as a whole. See it as a breadth measure.

The RRG above uses that $ONE benchmark. As you can see, the majority of the stocks are positioned to the right of the benchmark, indicating an uptrend.

BUT...

Many of the tails have started to roll over, and some of them have already dropped into the weakening quadrant.

This is because two things can happen. The first possibility is that these tails will remain at the right hand side of the graph and eventually make their way back to the leading quadrant (completing the rotation at the right hand side of the graph). This would mean that the current move lower is a setback within the long term uptrend. The other option is that the weakness persists and the tails continue their rotation all the way into the lagging quadrant.

Essentially, this sort of situation makes this universe of DJ Industrials stocks into a pool of mud, in which it is very easy to get very dirty.

There are a few stocks that attract my attention on this RRG. These are; AMGN, INTC, JNJ, and WBA.

AMGN really printed a really nasty reversal bar/candle this week, so I am going to put that one aside.

INTC is holding up very well and continuing to pick up relative strength, which makes it an interesting stock. On top of that, it is in line with the relative strength for the technology sector.

JNJ is holding up very well after the break to new highs a few months ago, and there is plenty of room for this stock to breathe without damaging the current trend.

Walgreens Boots Alliance - WBA

One of, if not THE, most interesting stock(s) inside the Industrials is WBA. This stock broke out of a long-lasting downtrend in price in November last year and has established a solid series of higher highs and higher lows since then.

On the way up, WBA took out resistance levels near $42.50 and $46.50 and is holding up well above the latter level despite the recent weakness. With the upside open towards the next overhead resistance level around $62.00-$62.50 and good support near $46.50, the former breakout level, this means a healthy risk/reward ratio.

Add to that the gradually improving relative strength of WBA against the general market and we have an interesting proposition.

For Option Traders

For those of you who trade options, now available in StockchartsACP via Tradier, these type of market conditions offer good opportunities to sell short-dated Call options covered by existing holdings in a portfolio. This enables you to pick up a little additional revenue and still hold the existing long position in the stock while the market takes a break.

#StaySafe, --Julius

My regular blog is the RRG Charts blog. If you would like to receive a notification when a new article is published there, simply "Subscribe" with your email address.


Julius de Kempenaer
Senior Technical Analyst, StockCharts.com
CreatorRelative Rotation Graphs
FounderRRG Research
Host ofSector Spotlight

Please find my handles for social media channels under the Bio below.

Feedback, comments or questions are welcome at Juliusdk@stockcharts.com. I cannot promise to respond to each and every message, but I will certainly read them and, where reasonably possible, use the feedback and comments or answer questions.

To discuss RRG with me on S.C.A.N., tag me using the handle Julius_RRG.

RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered trademarks of RRG Research.

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 of 2011 and was released on StockCharts.com in July of 2014. After graduating from the Dutch Royal Military Academy, Julius served in the Dutch Air Force in multiple officer ranks. He retired from the military as a captain in 1990 to enter the financial industry as a portfolio manager for Equity & Law (now part of AXA Investment Managers). Learn More
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