Thursday, October 23, 2008

The GE & QQQQ Reversion Trade

Here's a completely different approach to trading the Qs. Trade GE instead. I've got a trading buddy that I've known for years, quite successful and well ahead for the year. Like me, he likes to focus on just a few equities, but he plays them a little differently. His favorite play is a GE/QQQQ reversion. While you could play this like a pair trade, you generate better ROI (plus buy more risk) by just playing one side. He prefers the GE side.
Top set of charts shows GE and the Qs in 8 minute bars on Tuesday. Both love the pivots and the 8/16 MA crosses. The mid panel technicals (RSI, %D and StochRSI) are also eerily similar, as are the volume bars patterns, especially into the close. If you set these charts up side by side, this is the type of alignment you'll typically see.

Now, here is the GE chart extending 22 hours in 5 minute bars with the Qs shown as a gray overlay. Note the larger orange ellipses. . .these are areas where a divergence of slope and/or direction of the GE and Qs prices diverged. These are the opportunity areas. The problem is, of course, you never know when these little anomalies are going to develop. A lazy daytrader like myself can just monitor this chart/overlay off in a corner of the screen and wait for the trades to setup. With my platform, I can also set an audio alert to let me know when the prices diverge.
These are high probability trades. . . at least that's what Larry tells me and he's got an Aston Martin in his garage to back up his claim.
As an aside, check out the smaller yellow circles on the lower chart set . . . these are 8/16 MA crossovers that I mentioned yesterday (but now shown in 5 minute bars). Nothing wrong with these trades either, and while Larry got 2 trades in 22 hours, the 816 generated 10.


klynn55 said...

i see the price divergence in the orange circles, how do you play it?
which one and how? thanks, kerry

bill said...

hi BZB,

just want to clarify what you are saying and i am interpreting is correct.

Today - @ 9.30 am est
GE opened @ 19.07
and qqqq opened @ 30.69

withing next 10 mins at

qqqq close @ 30.60 and ge close at 18.56. this happened at 9.39.

As per this strategy should i have gone long GE and short qqqq.
with say 10000 dollars each.
so i would have bought 555 shares of GE and shorted 333 shares of qqqq. In next 1 hr could have sold ge for 18.95 and qqqq for 30.82.

so total profit would be 555* .40 - .22 *333 = 150 dollars

is this coorect assumption .

please comment

bzbtrader said...

Kerry and Bill,
I don't trade this as a pair . . that was an optional approach that I mentioned. I have to post another chart to answer your questions and can't do that in the comments sections. Will try to address the GE trade in a weekend post.

bzbtrader said...

I don't see the trade you mention.
Looking at 2 minute bars, GE and the Qs diverged slope at 10:00 est and reverted back at 10:20. That's about the best example I can find on yesterday's chart.