Macro Play of the Week: Gold vs Crude Oil

Flight Plan

Gold and Crude Oil have both been in uptrends but in fits and starts. I have detailed my view of their prospects on a short term and long term basis in the recent articles linked below. But when you look at how the two commodities trade against each other an interesting opportunity is developing.

The Set Up

Below is the weekly ratio chart of the Gold ETF (ticker:$GLD) against the Oil ETF (ticker:$USO). Notice it has been in a channel capped at 3.83 and supported at 3.19 since May 2010. Also note the dotted rising trend line extension from May 2009, about to meet the bottom of the channel. The ratio itself has been moving lower since November, about the time of start of the current Gold consolidation, and shortly after the latest trend higher for Crude Oil, testing the channel bottom this past week. Support under the channel and trend comes at a ratio of 2.80. This is a 38.2% retracement of the move from the low in June 2008 to the high in February 2009 and a spot of previous resistance from February through May of 2010. There is support lower at 2.62 and then 2.50 before the 50% retracement at 2.41. Resistance higher is at a ratio of 3.28, the 23.6% Fibonacci retracement of the previously described move and then the 50 week Simple Moving Average (SMA) at 3.50 and center of the Bollinger bands. The Relative Strength Index (RSI) has been decidedly trending lower since September 2010, and has a lot of room before being technically oversold. the Moving Average Convergence Divergence (MACD) indicator is also growing more negative, while the Bollinger bands are expanding to allow for more downside. Finally the SMA’s are all rolling over to flat. The bias for the ratio is set up to the downside.

The Trade

Sell the ratio on a break of 3.12, by buying 2,500 USO and selling short 800 GLD, with a target of at least 2.80 and using a stop of 3.19. This is risking $1,165.91-$1,190.16 to make $14,659.20-$16,360.71, or a reward to risk ratio of at least 12.3:1 using on the first target. If the trend reverses and the ratio breaks back above the 3.28 level then buy 3,200 GLD and sell short 10,500 USO with a target of a ratio of 3.83 using a 3.21 stop initially and then trailing it by 0.07 as it goes higher. Good luck& trade’m well.

Macro Week in Review/Preview April 2, 2011

Macro Month in Review/Preview March, 2011

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

Futures Chart and levels:

Buy Ratio on break of 12.80 with a target of 10.60, and sell ratio on a hold at 12.80 with targets at 14.93, 15.64 and 17.75.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

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
Dragonfly Caps Blog