Don't Ignore This Chart!

Is This Stock Breaking Out Or Building A Major Top-Formation?


On the weekly Relative Rotation Graph for US sectors, XLI, the Industrials sector is crossing over into the leading quadrant from improving. This indicates further improvement for Industrial stocks compared to other segments of the market.

While zooming in on the RRG for Industrial stocks against XLI I noted the rotation of DOV inside the weakening quadrant.

When a stock is at the right-hand side of the RRG, it means that its relative trend against the benchmark is already rising. A rotation into the weakening quadrant indicates a loss of relative momentum for that uptrend.

In strong trends rotations can complete at the right (strong relative trends) or the left (weak relative trends).

The rotational pattern that DOV is currently tracing out suggests that it is ready for a new period of outperformance vs XLI.

Dover Corp - DOV

On the price chart, DOV is breaking to new highs and the RS- and RRG-Lines confirm the recent improvement in relative strength. That looks positive and upward breaks, in general, are bullish.

At the same time, there are a few observations that could have more bearish implications.

Mid-2018 the RS-Line broke to new 3-year highs and subsequentially tested that breakout level as support. The rise off of that relative support level caused the curling up of the tail inside the weakening quadrant. At the moment the RS-Line is pushing against its recent high. The RS-Line needs to break higher in order to maintain the strong rotation and continue the relative uptrend against XLI.

If that break in RS does not happen, relative strength has plenty of room to the downside to deteriorate.

Apart from the break to new highs in the price chart, a massive broadening formation can also be detected with DOV now pushing against the upper boundary of that formation.

Broadening formations are typical topping formations that occur in times of high volatility for that stock.

This puts DOV at crossroads with the break to new highs and strong relative strength arguing for higher prices while a failure to break higher in relative strength in combination with a potential broadening formation would implicate serious downside risk.

From a swing trading perspective, a potential approach could be to buy DOV at current levels to benefit from a move higher after the break and anticipating a continuation of the strong rotation back to the leading quadrant on the RRG. But keeping a stop and reverse scenario in place as a backup plan.

Levels I am watching for reversing the bullish scenario are $89 if you're very aggressive or $86 if we want to give the market a little bit more leeway. These are the levels of the September and November peaks which should now act as support levels.

Either scenario provides a very decent risk/reward ratio.


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Julius de Kempenaer | 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 of 2011 and was released on 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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