Saturday, June 25, 2011

Trader alert: A huge opportunity could be setting up in energy right now

With Crude Oil getting decimated this morning, I couldn’t think of a better time to take a look at the Natural Gas to Crude Oil Ratio. This thing has been in a disastrous tailspin for as long as I can remember. This has been one of the best pairs trades out there with Natural Gas failing to find support with every chance it gets. Here is the longer term chart of $UNG vs $USO:

With the Crude Oil destruction this morning, the opposite trade is trying to finally catch a bid. The chart below shows the $UNG:$USO pairs trade battling with the 200 day moving average in a descending triangle-type formation. The Bullish divergence in RSI this Spring sparked a nice rally in this ratio and it appears to be consolidating those gains right now. RSI seems pretty positive here and the upward sloping 50 day moving average is another good thing. The trouble here lies with the declining 200 day. Typically, it is difficult to penetrate a downward sloping 200 day moving average for a sustained period of time. I would guess that a little bit more consolidation is necessary before a new uptrend can start.

I think we can watch this ratio right now for some potential entry points. I have no position yet but will be looking to put something on when the right risk/reward presents itself.

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