The Skinny Girl is Picking a Fight with the Fat Boy

• Posted by Greg Harmon
• on March 23rd, 2011

I think this is the most natural pairs trade ever. Fitness vs Calories. Healthy living vs Living Big. The Groove Pant vs the Big Mac. Yoga, Pilates, vs the Dollar menu. Lululemon (ticker: $LULU) vs McDonalds (ticker: $MCD). How can you be agnostic to Hottie’s versus Heavy’s? You have to be on one side or the other. So in this smack down who has the edge? Let’s look at the charts.

The Heavyweight Champ

The chart for McDonalds shows above shows improving technicals. After its December plunge it has found support twice at the 200 day Simple Moving Average (SMA). With a rising Relative Strength Index (RSI) and improving Moving Average Convergence Divergence (MACD) indicator it now looks to be heading higher. If it can get through the 50 day SMA then there is resistance at 75.90 and then 76.94. A bit leaner now and looks good for the fight. What about the contender.

The Contender

The chart for Lululemon shows the fall after earnings to the 50 day SMA which it has been riding ever since. The RSI is now turning up and the MACD is about to turn positive as the Bollinger bands are squeezing. All the SMA’s are sloping higher. This also looks ready to rumble. So who has the edge.

The Tale of the Tape

The ratio chart below shows a symmetrical triangle forming over the 50 day SMA. Currently the ratio at 1.06 is smack dab in the middle with the upper rail at 1.10 and the lower rail at 0.99. But the RSI is sloping and pointing higher and the MACD is improving. Also note that the trend longer term has been higher with all the SMA’s sloping up. Give the early lead to LULU, but it needs to break out to declare a winner. Keep watching as it plays out and ready the pairs trade below.

On a move of the ratio over 1.1 (over the top rail) buy 1,000 LULU and sell short 1,000 MCD. Use a stop just below the break out point. Resistance will come at 1.13 and the pattern projects a target of 1.34, or 0.24 above the breakout level.

On a move below the ratio of 0.99 (below the bottom rail) sell short 1,000 LULU and buy 1,000 MCD. Use a stop just above the break down point. Support will come at will come at 0.89 and 0.80 before the gap to 0.71. The pattern projects a target of 0.75, or 0.24 below the breakout level.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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