Old Mutual vs Nedbank
The chart considered is that of Old Mutual (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 (Old Mutual) has been underperforming security 2 (Nedbank). Bollinger Bands have been added to the RSC and highlights 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 Old Mutual Short Nedbank. 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:
- Old Mutual rising and Nedbank falling
- Old Mutual rising faster than Nedbank rising
- Old Mutual falling slower than Nedbank s falling.
Should one of these scenarios play out successfully the expectation would be a net gain of 3%.