MMI Holdings Ltd vs RMI Holdings
The chart considered is that of MMI (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 experienced a decline in value recently which highlights that security 1 (MMI) has been underperforming security 2 (RMI). Bollinger Bands have been added to the RSC and highlight the underperformance of security 1 reaching abnormality relative to the usual relationship of the two securities.
It is expected that the relationship between the two securities will revert to normality favouring a possible pair trade opportunity i.e. long MMI, short RMI. 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 securities in a number of ways:
- MMI rising and RMI falling
- MMI rising faster than RMI rising
- MMI falling slower than RMI falling
Should one of these scenarios play out successfully the expectation would be for a net gain of 4%. A stop-loss would be considered equal to the anticipated gain of 4%.