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00:00I'd like to introduce you all to Trevor Neal. Trevor Neal has been in the markets for almost
00:0940 years now, I believe. He specialises in technical analysis and you're going to get
00:16a bit of a demonstration today on some of the strategies he used. He started off on
00:21the London Commodities Exchange, I believe, has been the head of technical analysis at
00:25Bloomberg, so he's got a wealth of information and expertise. So yeah, I'll pass you over
00:32to Trevor and we'll go from there. Thank you very much indeed. I work in a sort of institutional
00:37environment. I work with big traders, bankers, oil companies, those sort of things. One
00:42of the wonderful things about technical analysis is that technical analysis is a very democratic
00:47thing. Actually, I can tell you, you're at no particular disadvantage to those people in
00:52those big dealing rooms there. You've got charting, they've basically got very similar indicators
00:57as you. They haven't got other ones that you haven't got. They've got powerful, very expensive
01:03screens that have maybe more data than you would really want. But their ability to analyse
01:12it is not greater than yours. You can become a good technical analyst, just as good as those
01:19people. So because they're in big institutions and have big amounts of money, you can be
01:24as good as them at doing technical analysis. Now, for people, for you and for them on a
01:32different scale, it's all a matter of choice. It's a what should I do? I've got many things
01:38I can do. I've got a limited amount of capital. They have limited amounts of capital too and
01:44mandates which only allow them to do certain things. But we've got a finite amount. But we've
01:49got lots of things that we can participate in and lots of opportunities. And the difficulty
01:55is making the choice of what's the best thing to do. And what I want to show you today is
02:01to do with making a choice about choosing and analysing many things together and seeing them
02:08clearly together so that you can make a good choice about what is the best thing to do.
02:15So let me just expand on this a little bit. If I talk simply at the beginning, you've got
02:20an amount of money and you've got the option of putting the money simply into the stock
02:26market or into bonds. OK? One of those two things. You've got many different types of
02:33graphs which will help you do that, ranging from the very simple to very complicated graphs. But here's
02:39a graph. There's an old graph. I've deliberately done that. And this is the S&P sometime time
02:46ago. So here's a normal chart without any indicators or trend lines on it of the S&P. So I don't know
02:52at this time what you think of the S&P here. But what we're likely to do is do something like
02:58this is to crowd it out with a lot of indicators. And you can recognise we've got Bollinger Bands
03:04here. We've got the Parabolic. We've got the MACD. We've got the Stochastic. And we've got
03:10the RSI on this. And this might be a typical trader's chart. Which is fine for analysing this
03:17security. But it doesn't tell you whether this is a good thing to do compared to something else.
03:23And that becomes very complicated when you're trying to look across many different opportunities
03:29and choices. So let's look at this one here. What do you think anybody want to tell me what
03:35they think this chart pattern is here? I'm sure there are people here. Man at the back putting
03:41up his hand and he's going to say...
03:42No it's not. Actually it's the S&P. The label's on the top. But what I meant was it's a reverse
03:59head and shoulders. So it's a head and shoulders. So here we've got a shoulder, head and a right
04:07shoulder and the neck line drawn in here. So this is, for a chart, it's perhaps a bullish
04:11looking chart and an opportunity starting to begin to move. So we might say I think there's
04:17opportunity in the S&P at this time. So don't forget I've got a choice of the S&P or I've
04:22got a choice of bonds. And this is a bond ETF here. Now let's have a look at this chart.
04:30And here we've got an uptrend line. We've got this triangle line there. We've got a resistance
04:35level. It's challenging that resistance level here. Do you think this is a more bullish
04:40or bearish sort of chart? A bullish chart. Would you say it's more bullish than the S&P?
04:48Which would you say is more bullish? The S&P. Now that's a sort of difficult question to
04:55sort of answer. I've just got a choice of two things and I can only put money in one or the
05:04other theoretically. So which am I going to place my money in? That's a simple choice that I've got
05:09to make. So the problem with a simple graph like the one we've just seen there is that they only
05:18answer the question, should I invest in it and where should I invest in it? It really doesn't have
05:25any context whether this is good compared to something else. It's only a measurement of itself.
05:31Now there is a way of looking at multiple things together in one chart and compare them like with
05:39like with each other. Now this is a popular technique used in the institutional market. I'm going to show
05:45you something here that you can have access to even though you haven't got a Bloomberg or a Reuters
05:51icon or one of these professional platforms. They license this and it's popular amongst the
05:57professional fund managers and professional traders. I'm going to show it to you and explain it to you
06:01now but you can you can see it. You don't have to have a Bloomberg or Reuters to see it. So
06:08when we talk about this is better than that we mean in a relative strength basis. This is better
06:15relative to the other thing. Relative is something divided by something. This is better than that
06:22and it's outperforming the other thing. So relative strength is actually everything. Which is better
06:29is a relative strength question. This is better than that. So that's a relative question. So here we've
06:36got and this would be a normal way of doing this. Here we've got the S&P chart that one with the reverse
06:41head and shoulders there and then we've got the S&P divided by the treasury bonds. So now this is the
06:50relative performance of the two. And you could see that at this period here that equities was coming
06:58down in a downtrend in relative performance but now it started to turn up. So you could say as a
07:05chartist actually the previous condition where there was underperformance in the equity market
07:11is actually changing and equity market is about to start to be the better investment. And so with my
07:17limited capital of choice that I've got and that choice that I've got between those two things
07:23equities and bonds equities should be the thing that I should be in and it wasn't the thing I
07:27should have been in up until now. Now that's a very simple question but of course it's not like
07:34that at all as this gentleman realized. It's much more complicated than that. So we could have bonds
07:40and then there are all sorts of different nationalities of bonds. Which ones of those is better?
07:44Is Japan better than, is Asia better than America? Equities too. We've got many equity markets. So the whole
07:50tree of complexity is spreading out enormously. Now these are here are the sectors of the S&P.
08:01And if you wanted to find out which is the best sector in the S&P, this is actually an extremely
08:09complicated thing to do in terms of the number of choices that you've got. So if you want to compare,
08:16there are 10, there are actually now 11, but there are 10 on here. And 10 is an easy number to divide by
08:21and multiply by, so forgive me if I stick with 10 for a bit. But there are now 11. There's just been a
08:28new one added. And here we've got a series. If we wanted to look at everyone versus everyone,
08:35that's 10 things. How many charts do you think we would have to look at to compare everyone with
08:44everyone? Not quite. A hundred, but then you'd be comparing the same with the same the other way
08:55round. So it's less than 100. Okay, I'll go through it with you. Okay, so let's do it here now. So here
09:02we don't want to compare the XLK with the XLK, so we can take all those ones out. The likes with likes,
09:10so we'll take all those ones out. Also something compared to something, A compared to B is the same
09:16as B compared to A as well. And so we can take half of them out because as well. So this leaves
09:25us with the following. With the 10 gigs level 1 sectors of the S&P, there would be 10 times 10,
09:35100 minus 10, divided by 90 divided by 2, and so that's 45 charts. So 10 sectors to actually compare
09:48every opportunity versus every opportunity. It requires you to look at 45 charts. That's a lot
09:54of charts, isn't it? If you were to go down to the industry level of the S&P, there are 24 industry
10:01sectors. And 24 by 24 is 576 minus 24, leaving 552 divided by 2. So you're not comparing yourself
10:10with self, but that's 276 charts you'd have to look at. And all you're looking at is 24 industry sectors.
10:18Now what do you think the S&P 500 is going to be? It's a very big number there. So it's virtually
10:27impossible for a human being to really do quite a modest task, which is to make a choice about
10:33things, because it's too many things to look at to make that choice. And even if you were trying to
10:39do it, you know, if you were scrolling through your charts and you were going through just 45 of them,
10:45you might say, well that looks better, but I can't remember what that one was at back there. So it's
10:50going to be very, very difficult indeed. So I want to present to you a solution to this problem.
10:56So now there are 11, so I'll correct it now. So 11 times 11 is 121 minus 11 is 110 divided by 2. So
11:04it's actually even worse, it's 55 charts. So this is the S&P materials sector here as a chart. And then
11:18this is the S&P materials sector divided by the S&P itself. And so this is the outperformance or
11:25underperformance of the S&P. And you can see that at this stage here, as this fell down, relative to
11:31all the other parts of the sector, it underperformed very sharply. And then it's turned
11:37now upwards, crossing that's a moving average, of course, on it and crossing the moving average.
11:42So we can see the change in the relative performance of it very clearly on that graph. But you'd
11:48have to be using that 270 times. But the problem is the following. When you're trying to compare
11:56each of those to each other, it's how do you compare them? We've got a value here. Now don't
12:04forget this is a ratio that we're looking at now, something divided by something. And this one,
12:09which looks pretty good, is at 0.182. Now if we look at this next one here, which is healthcare
12:17divided by the S&P. And this one here, when you look at this graph, I think you'd agree,
12:24does not look good at all. It's below its moving average. But it's at 0.32. It's a higher reading,
12:32but it's not as good. So the reading itself is not the measure you can use as to what is the best
12:38of these large number of graphs that you've been looking at. I can now introduce my colleague
12:44here. The JDK, Julius de Campenaar, is my colleague in Relative Rotation Graphs, BV,
12:51Research, RRG Research, BV. And we together are involved in this business. He's the clever one,
12:59he invented it. I just do research and work with people. So he's the clever one, there he is there.
13:05So the JDK is Julius de Campenaar. Now, he has developed, or we have developed,
13:12a way of normalising the ratios which allow us to compare like with like. So those numbers can be
13:18compared to each other. And also bring another dimension to it, something that we technical
13:24analysts understand about price action. So the individual RS lines, they give a pretty good clue
13:32to the individual comparison versus the benchmark. So they answer the question whether it's good or
13:38bad. But they don't answer the question how good they are compared to the other opportunities that
13:44we've got. Or can you say best or worst either from that information that we've got. The raw relative
13:51strength values, what we were just seeing there, are like apples and oranges and really can't be
13:57compared to each other. So we've got a lot of charts that we've ploughed through and it's now impossible
14:03to compare them to each other. They have to be normalised so that you can. And this is the values
14:10now that we have, by applying some mathematics to these values, we've created the JDK-RS ratio. So
14:18we've changed the ratios in that they are now normalised and you can compare each to each. And you say,
14:24this is better than that. Now, if you look at the sectors here, we've got the strongest one at this
14:36time at the top, the weakest one at the bottom. What people want to do, of course, is to be involved
14:41in the things which are in the top part there, maybe the top quartile, the top quarter, that's where
14:46their holdings might be. And they definitely don't want to be in the bottom part there. And fund managers
14:53will do the same. But the problem is, really, if you have your holdings in the top part there,
14:59you're missing a trick, really, because you're buying the things which have already arrived.
15:04The real money is to be made buying the things as they come up the list. In fact,
15:10low in the list, coming up and perhaps even accelerating up the list. But that's not something
15:16that you can see here. It's just a list, a column here. So we need more information. And so we need
15:22this extra dimension of time in it too. So the high values are good, the low values are bad. But how
15:31does this look over time is important. So here we've got two lines here. And I'll introduce the
15:42second line in a moment. But the first line is the RS ratio of the security. Here's 100 here. And
15:50and we here is the health care sector. And then here is its relative performance compared to the
16:01the S&P itself. And we can see where it's headed and where it's standing right now. But what it's
16:09still the high and the low readings in it here that we've got here, the number is a number that
16:19you actually meet twice, once on the way down and potentially on the way up. And that has a very
16:26different implication. In relative terms, weak and getting weaker is very different from it's been weak
16:34and now it's getting stronger. And so these points here are potentially much more interesting points.
16:41Now don't forget we're talking all the time on a relative basis there. So we need to know the direction
16:48as well as the actual value, which that column in your Excel sheet only gave you the value itself. So we need
16:55to know the movement in the column itself. So the other line is the rate of change of the relative ratio.
17:06Now many of you in the room, I think, are technical analysts here. This is a momentum measurement.
17:11What do we know about momentum in relation to the price? Momentum precedes price. We slow up
17:19before we change direction. That's an invariable really. So it's like if you throw a tennis ball into
17:25the air, if you had a high speed camera and observed it as it approached the top, it would be slowing up
17:31and you'd be ever more able to accurately predict where the top is going to be by observing the slowing
17:38up. We slow up into the turning point and then we speed up out of the turning point. Slow up before
17:45we've reached the top, slowing up, losing momentum, losing rate of change. Oscillators, you know,
17:52recognize this and for example you might be going up 10, up 10, up 10, up 6, up 4, up 2. We're still going
18:01up but the RSI is going down because we're losing momentum. Momentum precedes price. We slow up
18:08into the top and then we speed up out of the other end. We slow up into lows and then we speed up
18:15out of lows as it becomes clearer that the lows in place. So we've got a way of having a leading
18:22indicator of the changes in the ratio itself.
18:30So I've marked up on here this turning up and then this turning down, this turning down and this
18:38turning up whereas the momentum is giving the same messages earlier. So we want to capitalise
18:47on this phenomena but in a way that's clearer and that we can put all many, many things together in
18:53one picture. So we've got a lot of information now comparable across a whole universe. The RS approach
19:01in general adds value to investment. I can talk to you a lot about this but there's a lot of academic
19:06work that says, I suppose, the bleeding obvious which is that if you're in the good things you'll
19:12do better than the average. But a lot of academics spend a lot of time explaining that to us.
19:18But we don't want to have to flip through many, many charts and wouldn't it be nice if we could put
19:25all this into one picture, have lots and lots of things all in one picture. So what we've done is
19:31we've made this scattergram. It's a dynamic scattergram of this information. On the x-axis here we've got the ratio.
19:42So anything that's on the right here of 100 is outperforming the benchmark in the middle. So let's
19:49say it was the S&P, it could be the dollar, it could be the technology index and these could be the shares
19:55in the technology index. So any benchmark, anything that is what you're trying to out do better
20:01than. As I say, it could be currencies as well, it could be the dollar and we look at how the other
20:08currencies are relating to that. Anything to the right, further to the right means more out performance
20:15on a relative basis and then to the left is under performance. Then you see we've got 100 across the
20:20screen here too and this is the positive momentum of the relative performance. So the higher it is,
20:29the more positive momentum of relative performance. So think of the list there, that list being dynamic
20:36and things might be coming up, the list from low readings up towards the top and speeding up
20:43as they go up, increasing their momentum in relative strength.
20:48So this quadrant here we call the leading quadrant. Anything that's in that quadrant
20:53is not only outperforming on a relative basis but also has positive momentum. So these are good
21:00things here. Here are things that are weakening. They have got out performance but they're now losing
21:06that power and then maybe at certain stages candidates to get out of before they actually
21:13underperform when they cross that 100 line there. This is the horrible place that you don't want to be.
21:21This is where this is things which are underperforming on a relative basis and also got no upside momentum
21:27in them at all. And then here is maybe the interesting and the aggressive, more aggressive and more exciting
21:33place to be. These are things which are underperforming but are coming up the list with positive momentum.
21:40So these are the opportunities if you'd like to get in before other people have noticed them.
21:46Now we talk about in markets about rotation and markets rotating and sector rotation and things
21:56and things do rotate and you'll see in a moment they rotate in real life clockwise. That is the nature of
22:03the behaviour of these things.
22:06So here we've got a chart which is the US sector ETFs there and at this time and we've got a scattergram
22:17of it and this one here is the furthest to the right and therefore is on a relative basis is the
22:23strongest one. It's also the highest one so it's got the most positive momentum as well. And then we've
22:30got things over to the left hand side so we've got a scattergram of these in different quadrants.
22:36Now that is quite interesting but we're missing the thing which is how are they moving. Don't
22:42forget we saw that getting to these levels we get to them twice. It depends which way they're going
22:47through those high readings. Are they increasing or are they decreasing? So what we've done is we've
22:55taken we'll say what we'll do is we will sample a period earlier and in this case it's going to be
23:02weekly so we'll say last week. So where were they last week? So that way I get a pointer of how they're headed.
23:10So by adding one sample here I can see this one is going this direction heading northeast this one too
23:20and this one is moving a little bit in this direction this is also moving a little bit in that
23:24duration but that doesn't that's not a lot of information and it's not really very not helpful
23:29enough. Now I've added more points on it and so now we've got three data points on it and we've got a
23:38bit more of a story of where these things are headed. This the XLV here is heading eastwards on it.
23:47Northeast would be best because northeast would mean it's increasing in both relative performance and
23:52positive momentum. XLB is heading is in the wrong place it's in it's in the lagging segment and it's
24:01also heading southwest so its direction is losing relative performance and without positive momentum.
24:11So now I've made it five weeks along and I think we've got a clearer picture here. So how long should
24:17it be? How much information do you need? Well you can put a lot in if you want but I can tell you that
24:23it really you are most interested in what's happening recently as to what happened six months or a year ago.
24:29And so this is now this one has got 30 weeks of information. Now what we've managed to do is make
24:35what was a beautiful picture into a very cluttered and unreadable picture and actually who cares where it
24:42was 30 weeks ago. That doesn't really matter at all. We just want to know where it is now and where it's headed
24:48now. But what it does show is this rotation this clockwise motion of through the sectors you know things
24:55come in and out of fashion and the theme is something or other and then that wanes and it
25:02it moves around there. Time you know it's all cyclical this what's in fashion.
25:11So I think well that's it moving in a circle. So I would say personally I would say four or five
25:19is enough information. I just want the pointer of where it's headed. But what you have got in this
25:24is a lot of persistency in this in the sense that the direction tends to persist in this sort of time frame
25:31here. Now here I've got it moving dynamically you see here on the the chart on the top right here is
25:42the graph of the S&P itself and this is the window that you're looking at the five samples that vertical
25:49lines there and then here is going through time. So this is the story of that coming up to today and
25:56you can see how things have moved in and out of fashion and rotated around. And this is the current
26:04at the time value of them. So that's what we're trying to capitalize on is this information of the
26:11relative performance. The good thing is now we can put all these things together with each other.
26:15We could we could have more things in here and if we wanted to and and and we can look at different
26:21things. So how do you interpret all this information here? The first thing is that so this is this is the
26:30Dow or the US 30 I think I have to call it the US 30 the 30 stocks of the Dow in the scattergram here
26:39with no tail on it. So we'll add anything that's in this top right hand corner which we call the
26:47leading quadrant you might basically say are good holding things. They've got outperformance and
26:53they've got good momentum as well. Here the weakening quadrant are things that you potentially want to
26:59be getting out of and getting out of your portfolio moving away from. Here is the lagging quadrant this is
27:06things to avoid. And then here is these are the look for the a look for buys or resells in these in that
27:15sector then. If you are a more aggressive trader this is the area you'll be looking at for. You'll be
27:21looking for things in here that are close enough to the hundred and also heading in the northeast
27:27direction. And ideally also with the sample lengths expanding that means they're going up faster you
27:36know this week to last week and the week before that is an expanding pattern that means it's going
27:41faster they're going further each week. So we've now got a picture of that. So that's the basic
27:48message of those four quadrants and your opportunities or indeed your portfolio.
27:53So we can also look at it in another way that anything that's moving this way and is
28:00heading this way you could say or anything in that sector is a conservative buy.
28:05This is a conservative sell. Incidentally if you were a pairs trader if you were looking to buy
28:11something versus something then anything in the top right here you match off with something looking
28:16southwest in the bottom left of it. That's a nice way to pair off some things.
28:23The aggressive buys in this sector here and aggressive sells in this weakening sector here.
28:30So those are the basic messages. A couple of extra things is things say up at the top there is a long
28:36way from the middle. The middle but is the is the Dow itself is Goldman Sachs in this at this time here.
28:44Now it's a long way from the benchmark and so for to get our performance to generate true alpha you have
28:51to get outperformed the benchmark itself. So the best opportunities are away from the middle. Anything
28:57that's in near the middle is doing what the index is doing and so you're not going to get out performance
29:03from that. So here now this is 30th of August but I'm going to show you in a second the current values for it but
29:15here's how we were looking. This is weekly samples in it and you could see and that's versus the S&P.
29:23Yes, so I'll actually go to the the real live version now and we can look at it right up to date.
29:31So this is this is the stocks 50 the actual 50 stocks of the stocks 50 and you can see there's bear up at the top there
29:41screaming around there
29:44there and you know I'd be worried about anything that I saw coming down in here if I had it in my portfolio.
29:50Here's currencies versus the dollar. So this is a in the middle we've got the US dollar and we've got the
30:00yen here and then over there we've got
30:05GBP
30:09and so we let's say a very good trade here I think would be
30:14pairing off I think you can work out for yourself
30:17what might be the best thing to do rather than be long off the the yen or something like that. There's a better trade to be had which is very clear on here.
30:27So wrapping up visualize the relative trends and the positions of the elements in a universe in this unique way.
30:34Now this has been available
30:37for more than 10 years on Bloomberg, but you have to pay more than two thousand dollars a month to get a Bloomberg terminal
30:44and also on icon
30:46is the refinitive the Reuters
30:48terminal, but it is now available also on a on a retail platform and it's free and also
30:53Julius's research is available and he writes analysis of
30:58the messages of ROG which you can see for free as well.
31:02So it's not a trading system per se as you can see there it's quite subjective like a chart it is subjective
31:08so it's not a it's not an algo at all
31:14it's um but it is a way of visualizing complicated a lot of data in a clear
31:20a clear way and that's the challenge of today.
31:24It shows that markets do really rotate
31:27this is a picture of it doing that thing that we talk about
31:30markets did this 100 years ago and they did it 50 years ago they'll continue to do it
31:35there's nothing changing about that the fact that it's been discovered doesn't mean it won't work
31:40history repeats itself and it does it in circles
31:44the RRG charts help you visualize the rotational behavior and make better informed choices
31:51so here's my contact details here's the website i urge you to go and have a look at the
31:56relative rotation graphs.com there's a lot of free
32:00stuff on there and and articles and things like that that we've written
32:04about about using this in practice
32:08but i would draw your attention to
32:11stockcharts.com
32:12slash articles slash rrg because that's the interpretation written by julius
32:17and he writes a lot of great stuff on the markets and what the messages are
32:22about the markets and
32:25you know the sectors yes but also the individual securities as well
32:30for within the industry groups and within the sectors and even asset classes as well
Recommended
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