Sectoral Rotation (or) Relative Rotational Charts (RRC)

Sectoral Rotation, or Relative Rotational charts, are a powerful visual tool in assessing how different sectors within a portfolio compare in terms of their relative strength and momentum; it’s easier to spot which sectors are getting stronger or weaker compared to a benchmark, thus highlighting possible changes in market leadership and trends in asset performance

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In a future version of ChartAlert, users can look forward to the introduction of “Relative Rotational Charts.”

However, before delving into these innovative charts, it’s worth noting that the essential components for creating them — namely, the “RS-Ratio” and “RS-Momentum” indicators — have debuted in October 2023.


Sectoral Rotation, also known as Relative Rotational Charts (RR charts), offers an invaluable tool for conducting relative strength analysis. While RR charts aren’t predictive, they excel at assessing the relative strength trends of individual symbols or multiple symbols concurrently.

At its core, RR charts evaluate a symbol’s relative strength and corresponding momentum. Relative strength is determined by comparing a specific symbol (e.g., INFY) to an underlying Index (e.g., Nifty), quantifying its momentum as the relative momentum of the derived symbol (i.e., INFY/Nifty).

In the context of relative strength analysis, symbols can undergo independent evaluation, each paired with its unique underlying Index, or they can be contrasted with a set of other symbols deemed as competitors, all linked by a common underlying Index. This comparative assessment plays a crucial role in discerning the symbol’s placement within a broader spectrum of investment options.

RR charts rely on two key inputs: the “RS-Ratio” and “RS-Momentum” indicators. These indicators are thoughtfully normalized to enable meaningful comparisons among different symbols sharing the same underlying Index.

Credit: This work was inspired by the contributions of Julius de Kempenaer, the originator of Relative Rotation Graphs®

Disclaimer: Please be advised that Julius de Kempenaer, along with individuals affiliated with RRG Research or RRG Consulting BV, have no association with ChartAlert or the proposed introduction of sectoral rotation or relative rotational charts in ChartAlert at a future date.

Input #1: Relative Strength Ratio, or RS-Ratio

The RS-RATIO indicator plotted along with a 50-bar Moving Average and SuperTrend indicator for comparison

The RS-Ratio serves as a valuable tool for assessing a symbol’s relative strength trend. It quantifies and evaluates the strength of this trend by comparing the symbol’s performance to an underlying Index, such as the Nifty. An RS-Ratio above 0 indicates an uptrend, signifying strength, while a ratio below 0 suggests a downtrend, indicating weakness.

The extent to which the indicator surpasses 0 correlates with the strength of the uptrend. Significantly above 0 implies the symbol is outperforming the underlying Index, while notably below 0 indicates a robust downtrend.

The RS-Ratio is a trend-following indicator with inherent lag. This built-in lag factor effectively filters out short-term volatility, thereby providing a clearer view of the broader trend.

Input #2: Relative Strength Momentum, or RS-Momentum

The RS-MOMENTUM indicator plotted along with a 50-bar Moving Average and SuperTrend indicator for comparison

RS-Momentum is a valuable tool for gauging the momentum, or rate-of-change, of the RS-Ratio indicator. It often exhibits crossovers above 0 when the RS-Ratio is at a trough and starting to rise, and below 0 when the RS-Ratio reaches its peak and begins to decline.

In essence, RS-Momentum acts as an indicator of an indicator — the RS-Ratio. It oscillates above and below the 0 level, with meaningful crossovers requiring sustained movements.

Construction of a Relative Rotational Chart

Relative Rotational charts provide a visual representation of a symbol’s comparative strength and momentum. They feature two axes and four quadrants, with the RS-Ratio along the horizontal X-axis and RS-Momentum along the vertical Y-axis. The intersection point at 0 creates four distinct performance quadrants.

Quadrant 2 (top right): “Leaders” or “Outperformers”

Symbols displaying strong relative strength and momentum can be found in the upper right quadrant, often referred to as the “Leaders” or “Outperformers” quadrant (Q2). A favorable RS-Ratio indicates an upward performance trend coupled with positive momentum, signifying the durability of this upward movement.

Quadrant 3 (bottom right): “Weakening” or “Outperformers with Weakening Momentum”

As relative momentum starts to wane, symbols frequently shift towards the lower-right quadrant, commonly referred to as Quadrant 3 (Q3), also known as the “Weakening” or “Outperformers with Weakening Momentum” quadrant. In this context, a positive RS-Ratio continues to indicate an upward performance trend, but the negative momentum hints at a possible deceleration or weakening of this upward trajectory.

Quadrant 4 (bottom left): “Laggards” or “Underperformers”

When relative strength and momentum simultaneously diminish, symbols are positioned within the “Laggards” or “Underperformers” quadrant (Q4). In this quadrant, a negative RS-Ratio highlights a persistent performance downtrend, which is reinforced by negative momentum, signifying an ongoing decline.

Quadrant 1 (top left): “Improving” or “Underperformers with Improving Momentum”

As relative momentum gains momentum, symbols move up to the upper left quadrant, commonly referred to as Quadrant 1 (Q1) or the “Improving” or “Underperformers with Improving Momentum” quadrant. Even with a negative RS-Ratio, the presence of positive momentum indicates a possible slowdown or reversal of the ongoing downtrend.

Symbols traverse these four quadrants in a clockwise fashion, with right-side quadrants representing relative outperformance and left-side quadrants representing relative underperformance.

Relative Rotational charts (shown below) will be introduced in a future version of ChartAlert.

To gain a deeper understanding, let’s envision these four quadrants as two distinct halves. The right half signifies relative outperformance, while the left half indicates relative underperformance.

When a symbol makes a transition from the right half to the left half, it suggests that the symbol is currently “underperforming” compared to the underlying index. Conversely, when a symbol moves from the left half to the right half, it signals that the symbol is “outperforming” the underlying index.

In situations where a symbol fluctuates vertically but predominantly remains within the right half, it can be categorized as “outperforming” the underlying index, albeit with occasional fluctuations in relative momentum. Similarly, when a symbol oscillates vertically while primarily staying within the left half, it is labeled as “underperforming” the underlying index, despite fluctuations in relative momentum.

In summary, we can condense this information as follows:

Outperformers – Quadrant 2 and 3 (Green/Light Green)

These symbols showcase robust relative strength and exhibit fluctuations in relative momentum, positioned on the right side of the chart.

Underperformers – Quadrant 4 and 1 (Red/Light Red)

These symbols reflect lower relative strength and fluctuations in relative momentum, situated on the left side of the chart.

Rotation Sequence

Symbols typically follow a clockwise rotation through the four quadrants, initiated by the RS-Momentum indicator. For instance, a symbol in the “Leader” quadrant (Q2) transitions to the “Weakening” quadrant (Q3) when relative momentum decreases.

If weakening continues, the symbol moves to the “Laggard” quadrant (Q4) when the RS-Ratio falls below 0. As relative momentum improves, the symbol shifts to the “Improving” quadrant (Q1).

This cyclic or rotation pattern repeats continuously.

Interpreting Relative Rotational Charts

RR charts don’t predict trading outcomes or provide predefined signals but offer valuable insights open to interpretation.

The RS-Ratio holds more significance than RS-Momentum and is preferred for ranking symbols. RR charts’ circular patterns can vary due to symbol volatility.

Symbols predominantly on the right side of the plot indicate strong uptrends, with RS-Ratio above 0 and fluctuating RS-Momentum. (See this phenomenon in the images of NIFTYREALTY, MIFTYMIC250, NIFTYMETAL, NIFTYAUTO above)

Conversely, symbols on the left signify downtrends, with RS-Ratio below 0 and fluctuating RS-Momentum.

A shift from left to right signals a new uptrend, and vice versa, a new downtrend. (See this phenomenon in the images of NIFTYMEDIA and NIFTYIT above)

Understanding the RR chart model is crucial, but it’s important to recognize that it incorporates a lag time. This implies that a symbol can display an upward trend even before entering a specific quadrant, such as “Leaders.” Conversely, a symbol might experience its peak and subsequent decline before its line officially enters the “Laggards” quadrant.

In sum, RR charts offer a dynamic tool for assessing relative strength and momentum, aiding informed decisions for investors and analysts alike.

The top 3 sectoral indices as of 18-Sep-2023 (Monday)