Using the Change in Character in Crude Oil to Trade Stocks

• Posted by Greg Harmon
• on December 8th, 2011

Crude Oil had what we call a change of character moving from July into August. Can you tell from the chart below? Yeah, me neither. It had been falling since May before the precipitous move lower going into early August. But does that ‘W’ with a small ‘V’ or Cup and handle from August look familiar? Basically the same pattern as the broad market. So Crude Oil has become highly

correlated to equities. This is even more noticeable when you look at Crude Oil compared to travel related stocks. The common wisdom is that Airline stocks go up as the price of Crude Oil goes down and they go down as Crude Oil rises. But take a look at the chart below for Alaska Air Group, $ALK. This chart shows the price of Alaska Air using the candlesticks and the price of Crude Oil using the gold area chart behind it. Notice to the left side of the vertical blue line how common

wisdom prevails. Especially in the period from April through to July. But to the right hand side of that line the relationship turns into a positive correlation. As Crude Oil prices rise so does the price of the stock. This is the change of character, moving from an inverse correlation to a positive one. And this is not the only example. The change can also be found in the chart of Allegiant Travel, $ALGT, below. There is less evidence of a negative correlation, more like a lack of correlation to

the left side of the blue line but to the right hand side it moved higher as Crude Oil rose, stalled as Crude fell and then drove higher on the next Crude leg up. How long will this change of character last is anybody’s guess. But until it does change again it should not be a surprise that stocks like these, with strong correlations to Crude Oil, find resistance at the same point that Crude Oil does.

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