New Insights in the Gold to Oil Ratio in a Fortune Cookie

• Posted by Greg Harmon
• on February 10th, 2015

On January 22nd I was eating Chinese food and posted a simple ratio chart of the Gold ETF ($GLD) to the Oil ETF ($USO) on my tumblr. Here it is again:

If you cannot read the caption it says “this Gold vs Oil chart is getting out of control”

It turns out that after a run higher out of an 18 month base that week was the top in the Gold vs Oil ratio. It has pulled back since. The chart below shows it has now reached a 38.2% retracement of the move higher. That is a key Fibonacci level that many traders look for. It also gives a great opportunity for a trade. A bounce here and you can look for a move back towards the high from a few weeks ago. But a continued breakdown would set a target of a 61.8% retracement to a ratio of 5.08, 15% below. The problem is knowing which way it may go.

The typical indicators used for confirmation can be interpreted either way. The RSI has worked off the overbought condition and continues to fall, suggesting more downside. But the level of the RSI is still strongly in the bullish zone, and leveling. A sign of strength. The MACD is turning lower as well. But it is still far from a cross down to confirm a sell signal.

One other indicator on this chart may hold the key. It is likely that you did not consider this one. Notice that the orange area has acted as a leading indicator for the Gold vs Oil ratio over this timeframe (and maybe longer). It led the ratio out of consolidation and made a top a week ahead of the ratio. What is this mystery indicator? It is the the Shanghai Composite. Turns out the Chinese market has been a great predictor of the direction of the Gold vs Oil ratio. I should have paid attention to that fortune cookie.

And now it is bouncing. Is this a signal that the Gold vs Oil ratio is about to rise again? Time to order more Chinese food.

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