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First post: Broker dealers to outperform emerging markets

March 26, 2012

26 March

My first post shows that the iShares Broker Dealers (IAI) has broken above a base against the iShares Emerging Markets (EEM). These are U.S. listed Exchange Traded Funds. This example uses the Bollinger band contraction and breakout method shown in the ‘My methods’ section.

The chart shows IAI underperforming EEM for the last five years.

iShares Broker Dealers (IAI) versus iShares Emerging Markets (EEM)

Iaieem

  • The ratio has consolidated since September 2011, contracting the bands to the tightest in the last five years.
  • The ratio has broken above the upper band and band width has expanded. That is the entry signal to trade in the direction of the breakout.

Supporting evidence is given by:

  • The 40 week moving average turning up.
  • The visibly steep contraction of the bands and expansion soon after.

This a weekly chart and the signal was given by the end of week close on Friday 23rd March. The ratio is now 8% above the top of the range through the winter. Some might see this as missing the breakout but this move could be just the start of a longer term reversion for this pair.

The stop loss for this trade is below the consolidation that preceded the breakout, that is 13% away. Therefore for some this might not be a direct trade but a medium term orientation to their positions.

Footnotes

  • The 14 week RSI stands at 68. This is beyond the 40 to 60 mid range I had hoped for but when price has consolidated so tightly and then breaks out, the RSI can move quickly.
  • The band width is calculated on a percentage rather than absolute basis. They are not the tightest just because the ratio has fallen so far.

 

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