Tuesday, February 1, 2011

The Energy Sector vs. Consumer Discretionary (XLE; XLY)

From Dragonfly Capital comes a very illuminating comparison:
Here is your Bonus Idea. Did you notice that first set of ideas were all long in the energy sector and the second set were all short in the Consumer Discretionary sector. This is a pairs trade involving the XLE and XLY ETF’s. 

The ratio chart of the XLE to XLY has been creating a ‘W’ pattern and is in the rising right leg. 1.85 – 1.875 has been support so if it continues to hold above there look for the ratio to test resistance at the previous support level of 1.93. Through that level it can run to 2.00 or complete the pattern at 2.15. The Relative Strength Index of the ratio has been strongly in the bullish region without becoming too overbought, and the Moving Average Convergence Divergence indicator is positive and crossing higher.
The trade would be to short 2 lots of XLY against long one lot of XLE, using the levels above as stops and targets...MORE

HT: Abnormal Returns