$EEM vs $SPY $Pairs Trade

$EEM Emerging Markets vs $SPY SP500 $Pairs Trade.  One of the hidden strategies most people don’t talk about is “pairs trading”.   Some people talk about it but still the concept is not done right.   I learned this powerful strategy in the institutional world.

What is pairs trading?   Pairs trading is a hedge based strategy.    The goal is to trade one instrument and hedge with another instrument.    For example, if you like to trade Apple stock, you buy that instrument.   To hedge it, you should sell their major competitor.    As long as you limit your risk and make sure you get a 3:1 ratio, you will make money.   This strategy is executed every quarter so it starts to create a “residual” income every quarter.

The key is to make sure at least one of the instruments move in your direction.  To do this, we use technical analysis to determine the following:

  • Which/When instrument to buy
  • Which/When instrument to sell

Below is the weekly chart.   There is no setup right now but we are looking at this setup because Emerging markets has been stronger than the SP500 since the beginning of this year.   Now, it is at a multi-year multiple time frame resistance which dates back to July 2015.

The blue lines show the major support and resistance.   If the resistance is broken, we will looking at going long on $EEM and short $SPY.    If the support is broken, we will go long on $SPY and short $EEM.

 

Below is the daily time frame.   We are consolidating at the major resistance dating back to 2015 with multiple time frame support/resistance.        We will monitor the daily time frame to see if there is an early signal on which way this pair will go long term.

 

Update Gold vs Silver:

Below is the weekly chart of Gold vs Silver.   Last month, we posted when price got to the blue breakout dots, we would look at going long on Gold and short on Silver for a pairs trade.    When price reached the breakout entry, we evaluated.   Technically, everything looked good but from the money management, we could not see a 3:1 reward/risk ratio because the next major resistance was too close to our entry.   As a result, we had to wait for a pull back.   We got a pull back to the blue line.   At that point, we place option trades (calls) for Gold and puts for Silver.    The next major resistance is marked at 80.30

Update on $XLK vs $XLF:

Price is just consolidating for $XLK vs $XLF so we are going to remove this pair analysis.

 

Update on $UNH vs $CI:

We have been waiting for a setup for this pair and we finally got one.    Below is the weekly chart.   Price has been consolidating in the cloud.  However, we finally got a multiple time frame support.   We took the pairs trade with options at the blue line support for a bullish trend continuation.   The trailing stop is the green dots.    Preserve mode is the reward/risk tool.

 

Update on $BA vs $LMT:

Below is the weekly chart.   We are waiting for a pull back to re-enter another pairs trade.

 

 

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For educational purposes only. Commodity Futures Trading Commission, Forex, Futures, Equity and Options Trading has large potential rewards, but also has large potential risk and may not be suitable for everyone. View our full risk disclosure: https://www.ichimokutrade.com/c/disclaimer/

 

About the Author Manesh Patel