Sector Pairs trade: XLE vs XLU

Following on from the Sector Review from Saturday (link Below), here is a pairs trade idea with the SPDR sector funds. The Energy Sector SPDR ETF,$XLE, got hammered last week but recovered a bit of what it lost Friday. Conversely the Utilities Sector SPDR,$XLU, fell a bit from its lofty perch, but is still very high. With these rapid moves the trade below is looking for a kind of mean reversion. The chart below shows the ratio of the XLE to the XLU. Notice that over the last 5 trading sessions the ratio has moved from the top of the Bollinger bands through the bottom, just getting back into them on Friday. As this happened the Relative Strength Index (RSI) moved to a low and has now rebounded. The Moving Average Convergence Divergence (MACD) indicator went parabolic south but has leveled on Friday. There may be an opportunity for a quick snap back to the middle of the Bollinger band at the 20 day Simple Moving Average (SMA), 2.40. This is not a guarantee with a maverick like XLE, so keep a tight stop.

Trade Idea: Long 1 unit XLE and Short 2.31 units XLU target a ratio of 2.4, stop at a ratio of 2.28

In round terms this is long 1000 XLE and short 2300 XLU. If the ratio moves to 2.4 then the it would create a profit of $28.15-29.38 while risking between $9.64-$9.72 per group traded. A reward to risk ratio of at least 2.9:1.

Related: Energy Did Not Kill the Rock Star Rally

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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