Index Pairs Matrix; Ratio Performance At A Glance

Risk appetite has made a comeback just as we head into the end of Q3. With indices, yields and copper rallying, the oppressive forces Trump’s trade war has held over markets has been lifted, allowing markets to rebound like a jack in the box. There’s still no guarantee these talks will lead to anything, and there’s certainly a case to be made that China has tactically pushed talks into October to help markets rally through to China’s 70th anniversary on October 1st. But right now, who cares? It has lifted a bad spell and allows markets to cover shorts, regroup and refocus their energies.  

With Indices having broken out of their ranges, we’re looking at the relative performance of popular indices via ratio analysis. Whilst it can be used as an intermarket tool (and help sort out the strong from the weak) it can also be used for a pairs trade (where a trader goes long on one market and short another, in order to profit from the ratio and hedge out market risk).  

Here we have a matrix*, which shows 13-week % returns of index ratios. For example, we can see that Nasdaq/S&P500 ratio has increased by around 1.9% over the past 13 weeks and the FTSE/CAC ratio has fallen by 5%. Whilst raw percentage returns don’t account for what has happened in between the 13-week points, the matrix quickly shows the relative performance of 64 tradable ‘pairs’ and makes a good starting point before opening a chart.  

We can see the Nasdaq has been a strong contender against its peers the past rolling quarter, so this will remain on the bullish watchlist. Conversely, the Hang Seng has underperformed against its peers, so Nasdaq/Hang Seng could be a ratio to watch. Here are a couple of ideas generated from the table.

(Click on image to enlarge)

Long Nasdaq / Short Hang Seng

The Nasdaq/Hang Seng ratio is in a multi-year uptrend and accelerating away from its bullish trendline. Whilst it may be approaching a level of over-extension on the weekly chart, there’s no obvious signs of the top just yet. The daily chart is also in a strong uptrend and prices are coiling around their highs in a potential symmetrical triangle pattern. If prices are to break higher, bullish continuation is assumed. Whereas a notable break lower could suggest a correction is underway, or perhaps the beginning of a top. For now, the bias is for a bullish breakout.

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