Oil Services vs Crude Oil

Oil Services stocks ($OIH) have looked good as a group lately, especially the large cap names. But with a volatile market it has been difficult to find the right entry without getting stopped out. One way to deal with this is to enter using a pairs trade. A ratio that I track, the oil Services ETF against the United States Oil Fund ($USO) offers a good trade opportunity. The ratio below shows a breakout of the blue box of consolidation and some separation from the 61.8% Fibonacci retracement of the fast move lower in 2011. The next Fibonacci levels at 1.415 and then 1.478 are good initial targets. The Relative Strength Index (RSI) is supportive of a move higher and the Moving Average Convergence Divergence indicator (MACD) looks to be ready to turn higher in support as well.

oih-uso

Using 100 shares of OIH long against each short 135 shares of USO with a stop on the ratio below 1.31 gives a reward to risk ratio of 2.5:1 to just the first target. Put another way, this trade nets $250 at 1.415 vs a loss of $100 if stopped out.

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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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