Which Pawnshop to Choose

• Posted by Greg Harmon
• on December 7th, 2011

Recently I wrote about confusion in the charts in the Pay Day Lender space (link below). Often when there is confusion there is an opportunity to take advantage of the relative strength of stocks in a sector using a pairs trade. Lets use this to take a look at two of the stocks in this space, World Acceptance Corp, $WRLD, relative to EZCorp, $EZPW.

The ratio chart above depicts the relationship between $WRLD and $EZPW. There is a lot of interest in this chart. First it is building an ascending triangle with a top rail at a ratio of 2.42 after falling from the peak at 2.60 recently. Next the Bollinger bands are tightening foretelling a move in the near future. Third the Relative Strength Index (RSI) has held bullish and above the mid line as the ratio fell. Next the Moving Average Convergence Divergence (MACD) indicator is moving towards a bullish positive cross. With the Simple Moving Averages (SMA) sloping higher the bias is for this to break the triangle to the upside and establish a target of 2.59 with resistance at 2.52 along the way. But the MACD indicator is flattening as it approached zero and may glance off. And there have bee topping tails on the last few candles as it hits the top rail. A move lower and through the bottom rail at 2.34 triggers a target of 2.15 with support at 2.22 along the way.

From a pairs trade perspective this can be played two ways:

1. On a move over 2.42 Buy 5 $WRLD and sell 12 $EZPW , with a stop at 2.38 and a target of 2.59 This risks $2.00 to make $28 or a reward to risk ratio of 14:1.

2. On a move under 2.34 Buy 12 $EZPW and sell 5 $WRLD using 2.38 as a stop and looking for a target of 2.15. This risks about $2 to make $30. These are not exact as the ratio is still a bit away from this level.

Whether They Are Pawnshops or PayDay Lenders They Are Confusing

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