Greg Harmon at Dragonfly Capital wrote a great blog post titled “Playing Games with Activision Blizzard or Take Two Interactive.” I love looking at charts that include an additional dimension than the typical two-dimensional charts. In this case, another stock is added to the mix, which makes things more interesting—or at least spicier.

Based on technical analysis, Harmon reaches the following conclusion:

Trade Idea: Long TTWO against Short ATVI on the move above the top rail, looking for a move to 1.36 in the ratio. Use the 1.07 just below the top rail as a stop.

At Bigger Capital, we would take the opposite side of the trade because our spread software tells us to go Long Activision and Short Take Two. See the software’s output below.

Whose trade ideas will be correct? We both could be right, or we both could be wrong, or one of us could be right and the other one wrong.  It depends on many factors. At Bigger Capital, we do many of these spreads, and what matters to us is to be right overall in our portfolio of spreads, not on one particular trade.

What do you think?

Software Output

• 1 * ATVI - 1 * TTWO two-year spread is 95% co-integrated.
• Current Z score is -2.0.
• The mean of the spread with 1:1 leg ratio is $1.35.
• The current spread is $-0.8.
• The spread is trading below the 30-, 60-, and 90-day moving averages.

Important Notes:

• Hedge ratio is 1.12. To keep things simple, we rounded the ratio to 1; therefore, the leg ratio is just 1:1.
• A Z score below -2.0 is considered an oversold spread. A Z score above 2.0 is considered an overbought spread.
• Buy the spread means go long 1 * ATVI and short 1 * TTWO. Short the spread means go short 1 * ATVI and long 1 * TTWO.

Written by:

Aris David. Follow me on Twitter and StockTwits.

Michael Bigger. Follow me on Twitter and StockTwits.