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Profits From Higher Gas Prices

01/10/11 08:50:30 AM
by Mike Carr, CMT

According to some analysts, prices at the pump will certainly hit $4 a gallon in the coming year and may even top $5. The futures market is one way to benefit from such a rise.

Security:   RB
Position:   N/A

Unleaded gasoline can be traded as the reformulated gasoline blendstock for oxygen blending (RBOB). Open interest on the contract is more than 275,000 and average daily volume averages about 50,000 contracts, meaning there is sufficient liquidity for individual traders. Margin is relatively high, at more than $5,000 a contract.

An interesting point about this market right now is that the price is a gallon of gas relative to the price of crude oil at a record high. Figure 1 shows this relationship. At 2.66%, it is higher than ever before. While this indicator has shown a long-term uptrend, previous intermediate-term highs have been followed by higher highs in both gasoline and crude oil prices.

Figure 1 also shows the rate of change (ROC) indicator, which supports the bullish case for gasoline prices. The 26-week ROC recently crossed above its 13-week moving average. This indicator has demonstrated usefulness in the past when looking for the direction of the trend.

FIGURE 1: RB-067, WEEKLY. The middle clip shows that gasoline relative to crude oil is trending higher. The lower clip shows that the ROC has just broken out.
Graphic provided by: Trade Navigator.
Commercial positions, easily followed through the Commitment of Traders report, are relatively bearish at this time. They have a way of changing their positions quickly, so this indicator could be used to find an entry point in the market.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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