Playing the Brent vs. West Texas Crude Spread with ETF’s
- Posted by Greg Harmon
- on December 28th, 2011
In a post in mid November I laid out the case for the Brent Crude/West Texas Intermediate Crude Spread to revert to the mean (post below). This was interesting but not so practical for those of you that deal exclusively in stocks, as the two ETF’s that track the components, United States Brent Oil Fund, $BNO, and United States Oil Fund, $USO, are not always the best proxy for tracking their underlying. But a straight look at the ratio chart of the two now shows an opportunity on a pairs trade.
After spending 6 weeks pounding on support just under 1.95 the ratio of $BNO to $USO is breaking lower. It has support to continue the move lower from a falling Relative Strength Index (RSI) and a Moving Average Convergence Divergence (MACD) indicator that is about to cross negative. Support comes next around the 1.80 area which is also the smaller Measured Move and then 1.55-1.60. The larger Measured Move would take it to 1.70.
Trade Idea: Buy 2 USO and Sell 1 BNO
Use a ratio of 1.97 as a stop loss and look to take at least 1/2 off at 1.80. This trade risks $1 to make $5.65-6 for a reward to risk ratio of at least 5.56:1. Not too shabby.
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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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