In January I wrote an article suggesting to watch on the charts a reversal point of the Relative Strength Ratio of the Growth stocks vs. the Value stocks (see point HL4 on the graph), and its MACD, which indicated a potential reversal in favour of the Growth style.
I summarize below the concepts updating the graphs with the data of the last three months. The definitions of Value and Growth stocks come from Fundamental Analysis rather then Technical Analysis. However, Technical Analysis can also evaluate these types of stocks using the Relative Strength Ratio. If we historically compare the Euro Stoxx Total Market Growth Large Index with the Euro Stoxx Total Market Value Large Index creating a chart of the last twenty-one years, we obtain the following graph.
Every time the ratio rises, Growth stocks perform better than Value stocks. Each period has been separated with a vertical line coloured in red if the period is favourable to the Growth style or in green if the Value style predominates. Within the graph, you can see a performance table indicating the results for each period considered.
It is clear that in the long run the Growth style is numerically more performing (157,78% vs. 84,02%).
Towards the end of 2009, the Growth style took over the Value style, creating a historical low (L1), and two subsequent higher lows (HL2 and HL3), and a new higher low that I pointed out in my January article (HL4). But in this bullish construction there were no higher highs, but only a triple top that was formed between 2013 and 2018.
On a chart with a narrower time horizon, we can see that the indicator is forming a triangle pattern. It is interesting to note that an oscillator like the MACD can identify very clearly the negative divergences (indicated in the black dotted channels), which anticipate a potential weakness and fall of one style with respect to the other.
Now the MACD up crossed the zero line (b) and the Relative Strength ratio curve is pointing for the fourth time to the resistance line of the triangle. It is interesting to see the perfect fitting of all the points of the curve ratio within the two lines of the triangle. From point (a), the ratio took about 10 weeks to reach the current area (1). It is reasonable to think that it could reach the upper part of the triangle within one month or one and a half months: the battle continues.
Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – firstname.lastname@example.org
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.