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!
Get more of Chris Brecher’s strategies, analysis, and trade recommendations at Simpler Stocks.