Corn Against Oil: A Pairs Idea
- Posted by Greg Harmon
- on March 13th, 2014
Every trader has been talking about Corn ($ZC_F, $CORN) over the last few weeks, and for good reason it has been on fire. And the last over the last 2 weeks Cruse Oil ($CL_F, $USO) has also been interesting but in a different way. Crude is off over 6% over that period. But the ratio of Corn to Crude might be even more interesting. Take a look at the chart below.
This ratio is breaking over the slight downtrending resistance which has been in control since August. Additionally it is approaching the 200 day Simple Moving Average (SMA). It has not been above the 200 SMA since January 2013. There is support for it to push higher from the bullish RSI and the rising MACD. With the next major resistance at a ratio of 1.14 above it gives a strong trade opportunity.
Buy the ratio on a break over 0.96 with a stop just under the downtrending support line, around 0.93. With the ratio so close to 1 you can do this roughly by buying 100 shares of $CORN for every 100 shares of $USO you short. This gives a reward to risk ratio of 6:1 against a target of 1.14 above.
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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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