Watching the Relative Rotation Graph of the 30 Dow stocks, there are a few observations that can be made.
To begin with, there is a high concentration of stock inside the leading quadrant, including some mega-cap names like AAPL and MSFT and in the improving quadrant. The bottom half of the RRG holds only 8 stocks. Three in weakening and 5 inside lagging. It suggests that the current breadth of the market is still broad-based.
Summary
- Majority of Dow stocks in upper half of RRG
- CAT expected to continue underperformance
- Wait and see for INTC
- Avoid CSCO as it heads towards lagging at a weak RRG-Heading
- NKE poised for further rise and outperformance
- DIS setting up for a big move?
RRG rotations that are worth a closer look.
Inside the weakening quadrant we find BA, CSCO, and INTC. Especially INTC and CSCO are showing long tails that are pointing towards the lagging quadrant.
In the lagging quadrant, it is CAT that needs attention. The other stocks in that quadrant seem to be curling upward while CAT is at an RRG heading of almost 225 degrees (dropping at similar speed on both axes).
Inside the improving and leading quadrants, there are a few stocks at strong RRG headings (between 0-90 degrees) that I would like to inspect further. From left to right these are PG, KO, DIS, and NKE.
CAT in lagging
Right after the start of the new year CAT started to move lower reaching a support area around $ 140 around March / April. In a previous article, I wrote about CAT coming out of a wedge-like pattern while holding up above horizontal support in the relative strength chart...
Well, that situation clearly changed! There was a small attempt to move higher after that wedge break but the move rapidly stalled near $ 160 and reversed. This decline completed a small descending triangle in the RS-line and now also dropped below support on the price chart, starting a new series of lower highs and lower lows.
The RRG-Lines position CAT now well inside the lagging quadrant at a heading that is pointing lower on both scales.
The relative weakness suggests that there are better stocks than CAT to find among the 30 Dow Industrials.
INTC and CSCO at weak RRG heading
Both INTC and CSCO are inside the weakening quadrant on the Relative Rotation Graph and heading towards the lagging quadrant. Compared to the third stock inside the weakening quadrant, BA, these two have relatively long tails which indicates that there is strength (momentum) behind those moves.
This seems to be the strongest chart in the weakening quadrant. Given the level of the JdK RS-Ratio Line, there is still the possibility of a turnaround while inside weakening and a return to the leading quadrant.
The fact that the RS-Line is holding up above former resistance (now support) is helpful and also the bounce off the rising support line in the price chart is a positive for now.
I have added the dashed line on the chart to highlight a potential completed wedge which would suggest negative implications.
I am keeping an eye on the RS-Line to hold above horizontal support and the price to hold inside the rising channel. A break out of the trend channel combined with a break back below support in relative strength will seriously weaken this chart and bring it (close to) a rotation into lagging.
For now, I wait and see what the market in INTC tells me.
CSCO seems a different story. The RS-Ratio is very close to crossing below 100 and pushing the stock into the lagging quadrant and the weak RRG-heading supports such a rotation.
Both the price and the relative charts are showing patterns that can very well be seen as topping formations.
On the price chart the rising support line was broken and after a new low the recovery stopped at the former support line. This coming week will probably tell us more about the future intentions of CSCO's price path. $ 40 is the support level that I am watching to break for a further acceleration lower.
The RS-Line dropped below its previous low, signaling the end of the uptrend there and this is coming back in the RRG-Lines where RS-Momentum is now well below 100 and dropping while RS0-Ratio is on the verge of crossing lower.
CSCO definitely looks like a stock to avoid inside $INDU.
DIS and NKE in the upper half of RRG chart show strong rotations
The upper half of the RRG is densely populated at the moment. I mentioned PG, KO, DIS, and NKE as names that are worth a further investigation at first sight. After inspecting the charts of PG and KO I decided to concentrate on DIS and NKE.
PG and KO are not bad charts and both names are definitely heading in the right direction on the RRG but their price and relative charts are not very "conclusive" and as we have the liberty to concentrate on stuff that we like I am going to focus on the other two names.
Nike Inc. - NKE
Nike is camping inside the leading quadrant since late 2017 and recently went through a leading-weakening-leading rotation at the right-hand side of the RRG.
Thes rotations are usually strong signs as they indicate the second (or third etc) leg in an already rising trend.
When we look at the chart of NKE we see that the price is in a solid uptrend and is still well within the boundaries of that channel. The RS-Line completed a large bottoming formation that lasted all of 2017 and a good part of 2018 before finally breaking higher in April.
The gradual turnaround on the RS-chart has caused a stable move higher for the RS-Ratio pushing NKE into the leading quadrant at the beginning of 2018. After a small drop off in relative momentum, the stock rotated through weaning but is now back in the leading quadrant at a strong RRG-Heading.
NKE seems poised for a further rise and outperformance of $INDU.
Walt Disney Co. - DIS
Eyeballing the relative strength line of DIS vs $INDU suggests that it is still in a downtrend that started mid-2015. A closer look reveals a few observations that might make you think otherwise.
First of all, the distance (depth) between subsequent new lows is decreasing since late last year. If you look at a number of possible down trendlines running over relative highs since April 2017 you can see that two are already broke upwardly and the third (longer-term) is coming close.
This has resulted in a gradually changing set of RRG-Lines where the RS-Momentum line is now above 100 while RS-Ratio is rising and approaching the 100-level from below. This positions DIS inside the improving quadrant and close to crossing over into leading.
The big catalyst for DIS will come when the stock breaks upward out of a large triangle formation on the price chart.
Clearing $ 112.50 - $ 115.00 will trigger a big move for DIS.
Let me know what you think of this usage of RRG in the comments? If you want to receive a notification when a new article in the RRG blog is published? Simply "Subscribe" and leave your E-mail address.
Julius de Kempenaer | RRG Research
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered TradeMarks ®; of RRG Research
Follow RRG Research on social media:
 |
 |
 |
If you want to discuss RRG with me on SCAN, please use my handle Julius_RRG so that I will get a notification.
