Oil Services vs Crude Oil
- Posted by Greg Harmon
- on May 30th, 2013
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.
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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Gregory W. Harmon CMT, CFA, has traded since 1986 and held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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