Utilities Over Financials & Copper Over Emerging Markets

• Posted by Greg Harmon
• on June 30th, 2011

Long Term ETF Trades

The year is half over so it is time for a bit of longer term reflection. A review of the account and a check for some longer term trade opportunities. As I look at the weekly and monthly charts there are two longer term pairs trade ideas that show up between some of the macro ETF’s.

The first trade should play out over the next 2 to 3 months. It involves the iPath Dow Jones-UBS Copper Subindex Total Return ETN (ticker: $JJC) and the iShares MSCI Emerging Markets (ticker: $EEM). The weekly ratio chart below shows that the $JJC/$EEM ratio has been in a rising channel for 2 and a half years, outside of the one week that opened below it in 2010. The current week, with one

day to go, tested and held the channel support and is now rising. The Relative Strength Index (RSI) has risen to the mid line and the Moving Average Convergence Divergence (MACD) indicator is about to cross positive. On a continued move higher over a ratio of 1.19, look for the ratio to run to the top of the channel currently at about 1.42. The trade would be to buy 10 $JJC and sell short 12 $EEM. Using eh current closing prices as proxy the move to 1.42 would generate profit of about $110 per pair and using a ratio of 1.15, just under the 50 day Simple Moving Average (SMA) as a stop, risks about $20, for a reward to risk ratio of about 5.5:1.

The second trade is bit longer in nature and involves the Utilities Select Sector SPDR (ticker: $XLU) and the Financials Select Sector SPDR (ticker: $XLF). The monthly ratio chart of $XLU/$XLF below

shows it basing and approaching the 2.25 resistance level. The channel developing is roughly between the 50% and 61.8% Fibonacci retracement levels of the long move higher from 2003 to 2009. With the Bollinger bands tightening as the RSI is moving higher and the MACD is about to cross positive, it is setting up for a break out above the 2.25 level. The trade is to buy 20 $XLU and sell short 45 $XLF on a break of the 2.25 level looking for a move higher to a ratio of at least 2.56 or 2.75. Using June 30 closing prices and the lower target of 2.56 this trade would give a profit of over $92 and $150 for the 2.75 ratio. If you placed a stop at 2.18 , just under the Fibonacci level, the amount at risk is $22, for a reward to risk ratio of 4.2:1 on the lower target and 6.8:1 on the higher target. This trade could take the rest of the year to play out once it breaks.

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

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