The Coal Pit vs the Gas Pipeline
- Posted by Greg Harmon
- on August 30th, 2011
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.
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.
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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.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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