Macro Trade of the Week: Shiny Gold vs Black Gold

• Posted by Greg Harmon
• on May 9th, 2011

Two of the three commodities that took the headlines last week are again on the verge or abandoning their multiyear correlation. I am of course talking about Gold and Crude Oil. I apologize to all of you that can only have interest in Silver, but there are sure to be many other bloggers talking about it. Below is the ratio chart of Gold to Crude oil using the GLD and USO ETF’s.

$GLD vs $USO

There are two imbedded technical patterns at work on this chart. The first is an ascending triangle bounded by the rising dotted red line and the green resistance line at 3.83 since May 2009. The second is the channel between 3.19 and 3.83 that it has been in since May 2010. Notice that the ratio pierced the resistance level on Friday but finished lower. But look at the technical indicators. The Relative Strength Index (RSI) is rising sharply and the Moving Average Convergence Divergence (MACD) indicator is about to cross positive, as it expands the Bollinger bands on its rise higher. If it can hold above the 3.83 level then it may be read for a run higher with resistance at 4.07 and then targets of 4.47 and 5.29 from pattern completion.

The Trade

This ratio can be played on a break and hold over the 3.83 level as a pairs trade. It is likely not to trigger should Oil get over 100 and start to move higher again.

Long 100 shares GLD and short 383 shares USO as the pair, with a stop just under the 3.83 rail and a target of at least 4.47. This equates to a profit of $12.14 – 12.90 per pair traded at the first target and 24.39 – 28.44 per pair at the 4.47 target. Move the stop higher as it crosses the targets and or take some profits.

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

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