$BA vs $LMT $Pairs Trade Battle! Who is winning and who will Win long term? 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
It is the beginning of the quarter so this is the best time to start looking for “pairs” trade. Below is a trade for $BA Boeing vs $LMT Lockheed Martin.
We will step through the process below. For more details, you can find the information in our Option University.
Below is a zoomed out Monthly chart if $BA vs $LMT. If price goes up, this means $BA will be more bullish then $LMT. If price goes down, this means $LMT will be move bullish then $BA. We use this chart to determine when to place the pairs trade and which instrument to buy/sell.
The clearly shows a major long term support. We have held this three times now. To get to that support $LMT has been stronger than $BA. When that support is reached, $BA then becomes stronger until we reach the major resistance shown in the chart.
Below is a zoomed in Monthly.
Since July 2016 when price hit the major support $BA has been stronger than $LMT. Jan 2017, we broke the green line resistance signaling that the bearish movement is over and now the instrument will consolidate or try to start a bullish trend eventually. We say eventually because price has to get above the cloud to start a bullish trend and it is far away from that right now.
Below is the Weekly chart:
The weekly chart had a bullish setup Q1CY2017. That setup triggered into a bullish trend but has hit a major resistance show on the chart. As long as we maintain the support show at 0.64 red line, price can still go higher. If that support gets broken than we will consolidate and price will try to find the bottom of the consolidation pattern. The resistance we just encountered will be the top of the consolidation pattern.
Below is the Daily time frame:
On this chart, price is staying above the cloud which is showing the bullish trend. However, price has not been respecting the green line which is showing the bullish trend is not that strong. You can see see if price gets below the red line, this would possible start a bearish trend on the daily time frame which would not be good.
In conclusion, the charts are showing us that $BA is stronger than $LMT . The trend is not that strong as we want and we can see some weakness but until proven otherwise, we have to go with this relationship or “sit it out” until we see all the signs of weakness go i.e. resistance gets broken.
Let’s look at the individual stocks now for a bullish setup for $BA and bearish setup for $LMT. This will tell us when to enter this pairs trade. When the setup arrives, we will establish a trade by using options. Why options? You can limit your risk. Limiting your risk and getting a 3:1 reward/risk is the only way this strategy works.
Below is the weekly chart of $BA:
The chart shows we are in a nice strong bullish trend. The minor support is at 173.33. We missed hitting the support this week.
Below is the Daily chart for $BA:
The chart shows a resistance of 179.94 along with the support of 173.33. Therefore, we need for price to get to the support or break the resistance and then pull back to it again. Notice, earning is coming up towards the end of the month. It would be ideal if price gets to the support soon before the volatility of the options starts to go up.
Below is the 240m chart:
Notice it is a major support now. Monday/Tuesday should tell a lot. If $LMT is at a resistance now too then we can proceed forward on putting on the pairs trade.
Below is the weekly chart of $LMT
The chart is in a bullish consolidation pattern where it is trying to break out to the bullish side. However, a major resistance has developed around 269.34. The major support is 258.00
Below is the daily chart:
The chart shows the resistance at 269.34 and the major one at 270.83 that has stopped the bullish trend so far. The support is pretty much at the bottom the daily cloud right now.
Below is the 240m chart:
The 240m chart clearly shows the weakness in the bullish trend. Right now, you have a very thick cloud to go start a bearish trend. Ideally, we would like a pull back to the resistance couple of bars from now where the cloud will go thin.
In conclusion, we need either $BA to hit the support $LMT to hit the resistance in order to enter a trade.
EDUCATIONAL USE. 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. You must be aware of the risks and be willing to accept them in order to invest in these markets. Do not trade with money you can not afford to lose. This is neither a solicitation nor an offer to Buy/Sell. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this document. The past performance of any trading system or methodology is not necessarily indicative of future results. All information provided on the Blog is for educational purpose.