BHP Billiton PLC vs Anglo American PLC
The chart considered is that of Billiton (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 (Billiton) has been underperforming security 2 (Anglo American). 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 back to normality favouring a possible pair trade opportunity i.e. long Billiton, short Anglo American Plc.
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:
1. Billiton rising and Anglo American Plc
2. Billiton rising faster than Anglo American Plc
3. Billiton falling slower than Anglo American Plc
Should one of these scenarios play out successfully the expectation would be for a net gain of 3.8%. A stop-loss would be considered equal to the anticipated gain of 3.8%.