I'm contemplating this possibility. The chart suggests we're in a monthly uptrend since the 2011 low (the peak in gold). The range expansion to the downside culminated right into the uptrend mode, while rgmov is in an uptrend, and CCI hints at a possible crossunder -100. If this were to happen it'd be extremely interesting to open a position in this pair.
Right now, I'm long the market and a few select stocks and currencies (and gold), but I'm willing to flip short in gold and the euro soon. This would serve as the perfect excuse, if timed right. I'll update the chart when the opportunity materializes.
On the other hand, your chart is excellent work as a market indicator to show when and by how much equities are correlated to "Risk-On"/"Risk Off" or USD bullish or USD bearish, etc... since both events would present different trading strategies.
IvanLabrie
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Yep! :D
marketwizard
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Weighting is calculated by Beta and Delta or ATR. S&P could outperform gold on the upside, but Gold could outperform S&P on the downside. Again, both directional. If the premise is SPX outperforms Gold, then technically, both should rally and the rally is stronger in the SPX (hence SPX outperforms Gold). Conversely, if both should fall, the SPX should fall less than Gold. In this trade, you have an inverse correlation where each side of the pair moves inverse to the other side. Again, directional and pair trading is to reduce risk by creating a market neutral position (irregardless of the direction of the market). This pair is 100% correlated to the direction of the market, and each side of the pair is inversely correlated. If the correlation was positive, you would have a pair.
IvanLabrie
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True, but I treat it as a synthetic pair. This synthetic pair trends up.
Same can be done with TSLA/oil for example. Those are in fact correlated and TSLA has been outperforming oil.
I can elaborate baskets or portfolios based on synthetic pairs, and through technicals determine which is the way of organizing them, weigh each component and manage the whole thing.
It's a really interesting thing to do.
Cheers :)
marketwizard
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That's not a "pair trade" by definition. A Pair Trade is designed to capture the spread between two securities without taking a directional bet in either direction. In this case, long the market and short Gold are tactically one and the same. A pair trade would pair two stocks against each other, such that when the market goes up, taking both up, the long position out performs the short position, and when the market goes down, the short position outperforms the long position, hence resulting in a "market neutral" position. Short Gold and Long Stocks is a directional bet on both sides.
IvanLabrie
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Yes and no.
It is a directional bet, but profit comes from outperformance of S&P vs gold.
The weight on each side and position sizing are vital for it.