Choosing Johnny Walker Black over Black Velvet

Anybody who knows me knows my beverage preference is Johnny Walker Black. In fact I cannot imagine what I would do if I got offered a Black Velvet instead. Most people think this is because of my refined palette or years of sampling. And those do play a part, but it is also in part from the weekly chart below of the ratio of Diageo (ticker: $DEO) against Constellation Brands (ticker: $STZ).

Diageo is the distributor for Johnny Walker Black and maybe some other liquor, and Constellation Brands is the distributor for Black Velvet and a bunch of wines. But what is clear from the chart is that the ratio of DEO to STZ is retesting a downtrend support line that adjusted higher at the end of 2010 after breaking above it 2 weeks ago. Even with a large down day in the market the ratio stayed above the trend line at 4.01. There are also some positive indicators supporting a move higher. The Relative Strength Index (RSI) has been rising and the Moving Average Convergence Divergence (MACD) indicator is increasing after crossing higher a few weeks ago. Also the Bollinger bands are expanding on the latest gap higher. If it can hold the trend higher there is resistance at 4.20 followed by 4.30 and then 4.50 before the past high at 4.80.

Trade Idea: Buy 1 DEO and sell 4 STZ at 4.02 with a target of 4.50 and a stop at 3.95.

This trade yields a profit of $8.96-10.07 per pair at a ratio of 4.50 and $13.64-16.33 at 4.80, against risk of $1.40-1.42, or worst case reward to risk ratios of 6.3:1 at 4.50 and 9.6:1 at 4.80.

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

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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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