I may lose on the long position in XLP (consumer staples) because I believe the market is headed lower here, where I could buy it lower, if I wanted, in the next couple months. The fact that XLP is up to this point is due to the fact only a couple days have passed since I bought it. Let's leave this trade for a couple months. Today, my objective is to show you the tool you need to use if you are going to try pairs trading.

The IYZ (teleco providers) is down a lot today, so I am in the money there too. The main players in this index fund are companies that are trying to manage huge acquisitions, and that is the stuff, should a bear market start, analysts on Wall Street like to pick on as they find that the post-merger cost estimates had been understated (which is invariably the case). Also, interest rates here are headed north, and the telco's are companies with huge debt burdens they have to service. Rising rates make it tough on earnings.

So for now, I'm doing ok on both fronts, but really it is the spread that will determine if I made a good decision. The XLP in BLUE shows nicely against the IYZ in BLACK in the following chart from ADVFN.