On Tuesday, I mentioned that I first saw the Relative Rotation Graph (RRG) about 10 years ago, but underestimated its usefulness as a trading indicator. I want to expand on that today.
At the time, I remember thinking it was an impressive indicator. But I couldn’t understand how it could be applied to a comprehensive strategy.
I have spent decades studying relative strength. I instantly understood that RRG was a complex visualization of relative strength.
But as I am a big fan of Occam’s Razor, I didn’t give the RRG the time it deserved to fully understand it.
My colleague Chad Shoop, however, very much did…
Chad’s Unconventional Approach to the RRG
You might know Occam’s Razor is a philosophical principle, often summarized as “the simplest answer is usually the best one.” Philosophers use more formal language and define Occam’s Razor as the principle that “entities should not be multiplied beyond necessity.”
If relative strength is the entity, the principle states that the RRG multiplies it beyond necessity. Being a fan of this principle, this made sense at the time. So I stuck to traditional relative strength methods.
But it’s now clear to me that I took an overly simplistic view…
I knew that the lines on the RRG pointed to the strongest stocks relative to a larger index. But I already had a number of ways to mathematically identify the strongest stocks, so at the time I didn’t see a need to add one more tool to my portfolio.
Chad saw something different. He saw a way to find not just stocks that were already performing well… but ones that were on their way to being the strongest.
In other words, he was looking for pre-momentum stocks. That’s not something a lot of traders are concerned with. Usually, the spike in momentum is what alerts them to the trade in the first place.
This is a key edge. It means being early on the big short-term moves that lead to even bigger, longer-term moves.
4 Ways to Categorize Stock Moves
It might help to think of stocks as fitting into one of four categories. This is another insight I gained from Chad.
I always looked at stocks as fitting into one of two simple categories — going up or going down. Chad said there are two more categories. There are stocks that are about to go up and stocks that are about to go down.
I quickly realized he was right. The very crude chart below shows that idea.
I look for stocks that are going up. Chad looks for stocks that are getting ready to go up. He developed his radar screen to create a detailed and sophisticated image of the chart I shared.
It defines the above as stocks that are “strengthening, “leading,” “weakening,” and “lagging” compared to the broad market. You can see a much more organized and refined version of this idea, in the form of the RRG, below.
Chad is able to plot any group of stocks on this chart, against the performance of the index that contains them. Doing this, he can easily pinpoint which stocks are likely about to make big moves.
And with a bit of fine-tuning by way of his Fast Lane Code, Chad turned the Relative Rotation Graph into a tool that churns out dependable trade signals every single week. This is what turns the Relative Rotation Graph into Chad’s proprietary Profit Radar.
There’s no real valid reaction to what Chad’s created here other than to be highly impressed.
Few traders, especially in the newsletter space, can genuinely say they’ve created something new that gives them a substantial edge in the markets. Chad easily can.
The Profit Radar, Straight From the Source
I’ve done my best to do Chad’s Profit Radar justice here, but nobody can show you its power better than he can.
As you’ve more than likely heard by now, Chad’s putting out a special presentation early next week that will do a deep dive on this Profit Radar and his Fast Lane Code. At the same time, he’s opening the doors to this strategy to the broad public for the first time.
For True Options Masters, it’s our biggest launch since we kicked things off in May of this year. For Chad, it’s a moment he’s been anticipating since he first started testing this strategy nearly a year ago.
What you should know, though, is that Chad’s only taking 500 subscribers to start. This newsletter goes out to nearly 100,000 people, and the waitlist to view Chad’s presentation is already around 1,000 people. So, your chance to get in grows slimmer by the moment.
If you aren’t signed up yet, I must urge you to do so right here, and to look out for the release early next week.
Michael Carr, CMT, CFTe
Editor, One Trade
Chart of the Day:
This Quietly Doubled the S&P 500
All things considered, the stock market has had an exemplary year.
The S&P 500 is up almost 25% year-to-date. Compared to its long-term average of around 10% annually, that is an outlier return. More than double. Stock investors have plenty to be happy about.
Yet even that pales in comparison to what the commodities market has done this year.
The Invesco DB Commodity Index Tracking Fund (DBC) has returned nearly 47% year-to-date. Almost double the S&P 500.
This basket of commodities contains fuel like oil and gasoline, precious metals like gold and silver, industrial metals like copper and aluminum, and agricultural commodities like wheat and corn.
If you’re new to investing, this might not sound too surprising to you. But commodities are just coming out of a brutal bear market of many years. The action this year is likely the start of a new commodities bull market.
There’s always the chance that inflation and supply chain issues are contributing to the momentum here, and that it will wane. But my gut tells me to expect higher commodities prices in the coming years.
Managing Editor, True Options Masters