Often, there are times when I like to trade “the open” when there are pre-market divergences between some companion stocks.
What do I mean by companion stocks and divergences? Companion stocks usually have 3 characteristics:
1) Similar Industries – $LOW and $HD are both in the retail home improvement area. They correlate well.
2) Similar economic themes – $CAT and $BHP, even though in different industries, are both beneficiaries of stronger worldwide economic conditions.
3) Similar charts – I have seen some interesting correlations with totally unrelated industries that can benefit from weather related incidents. $HRL (the maker of SPAM) and $GNRC (the generator maker) correlate pretty well in hurricane season.
I recently did a trade I wanted to share with you. I did an opening trade in $DE.
$BHP, a European ADR, trades actively pre-opening. This morning, $BHP looked almost 7 percent lower, as most of the European materials stocks showed weakness after a recent massive rally.
$CAT showed some weakness as well and looked 1 ½ points lower.
$DE correlates well with both stocks, and it only looked down 40 cents. I found that the key was to short DE on the opening. The trade was good for 1.75 in less than an hour!
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