Don't Ignore This Chart!

Spotting A Pair Trade On Relative Rotation Graph Of US Sectors

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The above Relative Rotation Graph shows the daily rotation over the past 20-days for the Utilities and Industrials sectors.

I have isolated the tails of these two sectors to be able to show them in more detail and highlight the opposite directions that they started moving in.

When you bring up an RRG in order to get pair-trade ideas, this type of opposite RRG-Headings is what you are looking for.


Very often there will be more than one suggestion for a pair-trade opportunity from an RRG. They may highlight more or less aggressive trade ideas. Adapt any picks to your individual trading style and especially your risk appetite and ability to handle it.

In this case, both sectors are at the right-hand side of the graph, Jdk RS-Ratio > 100. Meaning that they are in relative uptrends against SPY.

Measured on the RS-Ratio scale (horizontal axis) XLI is still stronger than XLU but that is fading fast because of the strong RRG-Heading (moving in a 0-90 degree angle) and a stronger JdK RS-ratio measure for XLU.

When XLU reaches a higher RS-Ratio level than XLI, RRG suggests that an uptrend has started for XLU vs XLI. That has not happened yet which means that by looking and picking this pair to trade we are going to assume a continuation of the current rotation for both sectors.

After isolating the potential pair on the RRG, the next step is to switch to a regular graph for further inspection.

Utilities Select Sector SPDR - XLU

This is an UNadjusted chart

The XLU chart shows that the sector is attempting to take out overhead resistance around $57. So far it only managed to do that marginally and intraday. The uptrend of higher highs and higher lows is well established and still visible.

From a  trading perspective, this means that XLU has a bit of room to breathe before either the rising support line or horizontal support at the previous high/low will be violated.

The XLI chart, not shown, on the other hand, has just completed a small double top formation against horizontal resistance around $77.50 and is starting to pick up the pace to the downside.

All in all, this results in a relative strength line and RRG-Lines (both against XLI) that are showing signs of a turnaround situation that shifts the preference from Industrials to Utilities in coming days and maybe even weeks.

As the trade is a pair-trade with two legs any stops or kill-switches should be established based on the Relative Strength line between these two sectors and not on their individual price charts. It is very well possible that both sectors go up or down together and the pair-trade is still profitable because one moves faster or slower than the other.

 


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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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Announcement from the Author

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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 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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