Gaps, Divergences, Breakdowns and Breakouts, and Oscillators, with Research In Motion Exhibits
In this chapter, we compare a winner like Apple with losers like Research In Motion (RIMM) and Nokia (NOK). Hedge funds can make money on winners and sometimes even more money on losers. They can use a technique called pairs hedging to reduce their risk while they go long a winner and short a loser. Whether a stock is going up like Apple or going down like Research In Motion and Nokia, you will find technical signals like gaps and divergences to warn you of breakdowns and breakouts. You can use momentum signals and oscillators to catch the changes.
APPLE VERSUS RESEARCH IN MOTION, STOCK PAIRS HEDGING
For every winner there is a loser in the stock market. It is a zero-sum game. Because of Apple's tremendous success with the iPhone, competitors such as Nokia and Research In Motion become the losers. Hedge funds and individual investors with margin accounts can make money on both the winners and the losers. In this case, they can go long, buy stock in Apple, and short (i.e., sell borrowed stock), in Research In Motion or Nokia. When you do this, it is called pairs hedging because you are hedging your long with a short that is usually related in some way such as being in the same industry or sector. Thus, if there is a market crash or major pullback, and all stocks go down, including Apple, then the short position in Research In Motion or Nokia will make you money and hedge, or ...