In previous articles, we have talked about correlations, and we saw the direct relationship between Crude Oil and Gasoline. In this post, we will show how to trade using the correlation between Gasoline and Crude Oil.
Remembering the importance of gasoline
In our article published on April 21 “Is Oil Losing Momentum? – Part 3”, we talk about the positive correlation between gasoline and crude oil and Brent oil. The following graph corresponds to the relationship between the three commodities.
In our first example, below, we see the Gasoline and USOil 2-hour chart. In this case, we observe a bearish sequence in Gasoline; it is a lower highs movement while Crude Oil maintains the bullish bias. The Gasoline breakdown is an alert of the bullish trend exhaustion. While the short position is active after the USOil breakdown and the price closes below the previous low at 62.42.
In the second example, we observe an alternative case. In this context, RB makes a new lower low, while USOil makes a higher low. At the same time, USOil is the first commodity to make the breakout, and once it retraces, RB surpasses the previous high. In this scenario, we are likely tempted to enter the market, but it is essential to have the confirmation of Gasoline before pulling the trigger. Once the RB breakout is confirmed, the long position in USOil is valid.
The conclusion – How to trade it?
A previous trend analysis must support this strategy. Remember that Gasoline is considered as a leading indicator from Crude Oil and Brent Oil. To trade Crude Oil using the correlation, we should wait for the divergence between RB and USOil. After that, we have to wait for the breakout in Crude Oil. If Gasoline is the commodity whose price lags, it is essential to wait for confirmation before pulling the trigger.