Newgold vs Anglogold
The chart considered is that of Newgold (candlestick), with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) compares the price of one security with that of another in a ratio format. The RSC has recently experienced a decline in value which highlights that security 1 (Newgold) has been underperforming security 2 (Anglogold).
Bollinger Bands have been added to the RSC. The RSC is below the lower Bollinger Band, which highlights the underperformance of security 1 reaching more than two standard deviations from the average 20-day relationship (red line on RSC) of the two securities. It is expected that the relationship between the two securities will revert back to this average, favouring a possible pair trade opportunity i.e. Long Newgold, Short Anglogold.
The target from the technical indications would be for the RSC to move back towards the 20MA (red line) which is regarded as the mean. This could occur with the price movements of the two securities in a number of ways:
1. Newgold rising and Anglogold falling
2. Newgold rising faster than Anglogold rising
3. Newgold falling slower than Anglogold falling.
Should one of these scenarios play out successfully the expectation would be for a net gain of 10%, which is the approximate distance from the current RSC value to the mean or 20MA. A stoploss would be considered equal to the anticipated gain of 10%.