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Banks v railroads revisited

November 19, 2012

19 November

On 22 October, I showed a sector pair of Philadelphia Banks Index (BKX) vs. S&P Railroads Index, showing the first moving average crossover since September 2004.

This pair has traded sideways since then and these long term rotations can take a while to occur. For timing, we need other methods and a Bollinger Band breakout method is one possibility.

The daily ratio chart is below.

Bkxgs56raildaily191112

  • The 40 day moving average is rising
  • The 40 day Bollinger Bands have contracted
  • The 14 day RSI has unwound to mid range
  • The high in March came with an RSI divergence, as did the start of the consolidation in October
  • The RSI has unwound to mid range

The upper Bollinger Band has been broken but the bands still contract. The signal is a break above resistance level (shown in green) and an expansion of the band width.

Note that this is just an entry technique, the trade category is still a moving average crossover method. Therefore there is no ‘tightest bands in x periods’ criterion.

In terms of stocks to trade this through, I did not find any examples that replicate the above chart, but I don’t have all day for that. Use the signal for asset allocation or have a more in depth look.

The stop loss on this is a break back below the consolidation of the last two months. The range has been tight at only 4.4% from top to bottom and the potential upside is many times that.

 

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