Qs divided by S&P500 same same as 2 divided by 4 that is a RATIO, Horatio Retard. Do some fckin work thinking for yourself, clown.
Correct! You must have market direction established first. To do this you must have both charts of Qs and S&P. Say for LONG, the markets are in an uptrend. That means generally speaking all major indexes are heading north and have been for some time. Now you go into RATIO analysis and pick the lead horse. Then you go LONG the lead horse. When done, go lick some pussy and celibrate your former celibacy. Over and out. Whew!!!!
Do me a favor and put me on your ignore list. Dividing Qs by S&P doesn't tell you the point at which you should enter the trade, which is what this thread was about.
I think you're right. And since I can't predict direction (which is what it fundamentally comes down to)... OUT!
I think the point deadbroke is trying to make is that in a certain market picking the lead horse wins - for example, in this case the lead horse would be the higher beta of the two (QQQ). In an up market it should outperform (SPY), and vice versa in a downmarket (obviously not always the case). Being long higher beta stocks in an uptrend is a good idea, the question is always how you protect when the market isn't doing as you plan. To answer your question, yes this is a pair trade of sorts, but it differs in that many of the constituent companies are shared between the two - that changes the dynamic of the trade versus a Pepsi/Coke pair trade.
Go on the amazon website and buy the books on pairs trading. When done, if you are not discouraged or did not realize yet that this is 1980 stuff that does not work that easilly anymore then you can go to the Pairs trading thread and talk with the folks using Pair Trade Finder on stocks. http://www.elitetrader.com/vb/showthread.php?s=&threadid=134253
Considering the S&P 500 as thee market, and considering SPY as a proxy. dividing the cubes by SPY. yields a relative strength. A synthetic "price". It neutralizes the influence of thee market thus revealing pure price movement (up or down). One minor flaw is losing HL range. You're pitting one close against another. When RS is rising it's out-performing. In terms of signals, you treat it as you would any price. Triangles, oscillators, moving averages, etc. I'd suggest that pairs trading is more highly correlated and concentrated (not an entire index). CAT vs DE for example. Ties up "double" the capital + transaction costs toward a perceived reversion to the mean (which may not materialized for an extended period). Not very "cost" effective on an ongoing basis.