NY FANG+ Universe’s Clear Split Provides Pair Trading Opportunities | RRG chart

It’s no secret that the NYFANG+ index is still showing impressive gains after bottoming in October last year and subsequently breaking through significant overhead resistance around 8.000. Over the past three to five weeks, the index has been stagnating just below 10,000 and then trending sideways.

split universe

But internally, there are some big moves happening. This can be clearly seen in the relative rotation graph.

In the weekly RRG, the split between the individual stocks in this universe is clearly visible. AMD, NVDA, META, and NFLX are all within the leading quadrant and in a positive RRG direction. AMZN is within the lagging quadrant, but very close to the benchmark and in a positive RRG direction. TSLA, AAPL, GOOGL, and MSFT are in the internal lag and negative RRG titles. There are also eyes in the negative RRG direction but inside the weakening quadrant. MSFT is the only stock with an inside trailing direction that is neither negative nor positive.

Given the incredibly steep market rally (NYFANG), entering a new long position at current levels means taking on a lot of risk. This in no way means selling the indices or stronger stocks in this group when you own them. It is undeniable that the trend is still here. But as we all know, the longer and steeper the trend, the higher the risk.

Still, if you are looking for some trading action, I prefer to look at some pairs trading opportunities.

long side

Longside candidates for the pair trade are NVDA, META, AMD, NFLX, and AMZN.

If you look at the individual charts for NVDA, META, and AMD, they have almost vertical trajectories and are very deep inside the leading quadrant. This leaves NFLX and AMZN as potential candidates. Because it looks like they still have upside potential.

AMZN or NFLX

If you look at both charts, they look very similar. Both recently broke overhead resistance and both are on track to test their respective all-time highs.

NFLX’s upside potential measured from current levels to ATH is approximately 14%, while for AMZN it is only 6%. Combine this with NFLX’s tail already being inside the leading quadrant and in a strong RRG direction, while AMZN is still within the lagging quadrant (positive direction) and my preference is for NFLX. The price potential is higher and it has already transitioned from a relative downtrend to a relative uptrend.

short side

Candidates for the short side of pair trading would come from TSLA, AAPL, GOOGL or SNOW. And honestly, all four would be good candidates. However, AAPL and TSLA are relatively close to support levels where demand could increase. It may be temporary, but we must assume that further immediate declines can be halted.

google or snow

GOOGL and SNOW will then undergo further inspection.

The downside risk/potential for both to the next support level is very similar, around 12-13%. However, GOOGL’s tail is already well inside the lagging quadrant and has broken below the previous relative low, confirming the already existing downward trend in relative strength. This makes me lean a bit more towards GOOGL as a short candidate, but you can find just as good an argument for SNOW.

You could also consider a three-legged stance, with NFLX being the long side half, and GOOGL and SNOW each using the short side half.

This approach will allow you to be agnostic about the general market direction and still be “in the game.”

#StayAlert Have a nice weekend. –Julius