The graph above shows how the pricing of industrials relative to resources has pushed the relative ratio to a high of 2.54 during the course of last week. While this outperformance is really not unique, what is of interest is the huge surge over the past 2 weeks pushing the ratio outside of the upper bollinger band as well as the fact that following Friday's trading there seems to be a potential for a reversal in the making.
I also looked at graphs of the STXRESI and STXINDI individually. The STX RESI shows that the stochastic is oversold and has just crossed back over its signal line. This is accompanied by a long-tailed candle painting on Friday and we also see that volume has been declining during the tail-end of this sell-off - potentially indicative of seller exhaustion.
This seems to support a case for a reversal or at least a relative reversal being on the cards.
For the STX INDI while the stochastic is also oversold, it still remains pointed firmly downwards following a thick bearish candle being painted on Friday and conversely to the RESI graph, volume has also increased during the tail-end of this sell-off.
Trade setup as follows: Sell STXINDI at R71.23 and Buy STXRESI at R28.20 (Friday's closing prices) yielding a 2.53 entry ratio. The stop is a close above 2.6 (above the previous relative swing high) and the target is at 2.30 (close to the middle line of the bollinger bands). This yields a target reward-risk of 3-1
Managed a partial entry on this pairs trade during the day. Will look to fill the balance tomorrow around the target prices noted above.
ReplyDeleteFilled up at target price - now the position needs to be monitored and managed
ReplyDeleteRather dramatic collapse in resource prices today and with the overall market showing strength, this ratio has gone significantly off kilter closing outside of our stop loss at 2.66. The end of day stop has been violated and we need to look for a potential trade exit unless there's something dramatic happens overnight, which does not appear likely.
ReplyDeleteWell nothing dramatic from a reversal perspective but I've decided to continue to hold for now - there was a slight weakening in the ratio over the day which supported the trade and I'll re-evalaute intraday tomorrow to see if there's any follow through
ReplyDeleteContinuing to hold as the ratio seems to have topped out and is in the process of reversing down. Looking at the individual and INDI components respectively, the INDI stochastic seems to be crossing back down over its signal lines at a low level (a potential bearish "failed stochastic" scenario). Conversely the RESI stochastic has now crossed up out of oversold territory and is looking towards short-term bullishness. There thus seems to be good potential for this pairs trade to play out during the course of next week.
ReplyDeleteAnd finally took the pain on this trade closing out at a ratio of 2.72 for a 3.1-1 loss. This trade has illustrated a number of important (all be they obvious ones!) lessons. (1) The market is like a 5 year-old child - what it SHOULD do, what we WANT it to do and what ACTUALLY happens are often worlds apart. (2) Stop losses once established MUST be respected. Note my comments between Nov 17 and 18 above - letting the losing trade run is not a high probability winning strategy. (3) stick to a tried and tested methodology - the long and short of this lesson is that I need more experience in identifying high probability pairs trades before executing more of these - they may appear sophisticated and interesting but that in itself should be a warning signal! So overall not a great trade but on the credit side not a disaster because even with a 3-1 loss, as long as the initial risk factor represents a small percentage of capital, the financial impact is acceptable.
ReplyDelete