Big Machines Pairs Trade

• Posted by Greg Harmon
• on March 5th, 2012

One of the ‘Money’ trades has been a pairs trade using Caterpillar, $CAT, and Deere, $DE, and it just triggered. Look at the ratio chart for $CAT vs $DE below. What is significant about where it is now is that the RSI has crossed 70 going lower, like it has 5 times previously, and the MACD is crossing negative, like it has 5 times previously on the chart, and each time this has lead to a move sharply lower in the ratio. Currently at 1.36 look for it to pullback to the 1.30 area at least and

history suggests 1.26 or lower. To trade this you need to buy Deere, $DE and sell Caterpillar, $CAT at the ratio of 1.36.

Buy 15 shares of $DE and Sell short 11 shares of $CAT

This approximates the ratio and uses no cash. Use a stop of 1.375 in the ratio, which risks about $16 to make about $90 at a ratio of 1.26, or a reward to risk ratio of 5.6:1.

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