Man Uggs vs Flip Flops: Pairs Trade

The battle of footwear giants is heating up while the temperature is falling. How can you capitalize on it? Buy Deckers and short Crocs at a ratio of 1:5. Let examine the trade.

Deckers, (Ticker: DECK), the maker of Ugg boots, has had a strong run from October to December and has consolidated since then. But now it looks poised to move higher with a rising Relative Strength Index (RSI) bouncing off of the the 50 level and the Moving Average Convergence Divergence (MACD) indicator improving and nearing a bullish cross. Look for DECK to retest the highs of December at 87.5 in the short run. Below is the chart for DECK.

Crocs, (Ticker: CROX), the maker of ugly plastic shoes and flip flops, however has been having a tough time of it the last month after reaching its high in December. In fact, Friday it fell below the 50 day Simple Moving Average (SMA) and looks like it may continue lower with support at 16 and then below at 15.49 the long time support resistance area.
Below is the chart for CROX.

Now look at the ratio chart of the two stocks below

This chart shows a consolidating range for the ratio over the last 6 weeks between 4.40 and 4.80 after a move higher from 3.8. Notice the MACD is about to cross higher and the RSI is rising. Also note that the recent move higher began when the 50 day SMA crossed higher through the 200 day SMA. If the ratio can break above the range there is resistance at 5.20 and then 5.60. The trigger to enter is a ratio above 4.85. If DECK moves to 87.5 and CROX moves to 15.49 the ratio would be 5.64, making it the target for the trade. The trade should also be exited if it moves against with a stop loss set at a ratio of 4.7-4.75.

Trade’m well.

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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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