The Coal Pit vs the Gas Pipeline

In a post from June I noted that Natural Gas and Coal had been trading as mirror images of each other (link below). The pair, as measured by Market Vectors – Coal ETF (ticker: $KOL) and iPath DoW Jones Natural Gas Subindex Total Return ETN (ticker: $GAZ), has traded in a broad channel between a ratio of 5.52 and 7.03. The ratio chart below shows this channel that has been in place since January 2011. Today with the ratio breaking above resistance at 6.51 it looks ready to test the top rail again. The Relative Strength Index (RSI) rising steeply and through the mid line and the

Moving Average Convergence Divergence (MACD) indicator crossing positive, support further upside. It now has resistance at 6.80 and then the top rail at 7.03. This can be played as a pairs trade as below.

Buy 10 shares of $KOL and sell short 65 shares of $GAZ

This should be traded using a ratio of 6.42 as a stop and looking for a target of at least 6.80 but likely 7.03. A move higher to 6.80 gives a profit of $16.80 and $29-$31 at 7.03. The stop caps your loss at $7.30. This makes the reward to risk ratio 2.30:1 at 6.80 and about 4:1 at the top rail.

Energy Forecast: Oily With a Chance of Gas

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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