Teva Pharmaceuticals set to resume underperformance

14 May (blog 3)

Here is another example of a Bollinger band breakout trade, similar to the Mexican pair that I updated earlier today.

This is a health sector pair: long SPDR Health Care (XLV), short Teva Pharmaceuticals (TEVA), an Israeli company with an ADR.

XLV versus TEVA weekly

• After a long term downtrend, the ratio based in 2009 and 2010
• The ratio has consolidated since September 2011, allowing the Bollinger bands to contract to their tightest for years (tightest in three years is the criterion)
• Last week, the ratio broke above the upper band and the band width expanded
• The breakout is in the direction of the moving average, something I am looking for now for these trades

Daily chart

• The ratio is overbought in the short term but that is what happens with volatility breakouts
• The ratio may or may not pull back in the short term, that isn’t the point. The point is, this is set up to continue higher in the medium term
• The stop loss is below the mid April low (red arrow)