Gasoline/Crude Spread: Switch to October Contracts

RBOB Gasoline/Crude Oil Spread

The September crude oil contract expires in a week, so we are going to switch from stalking the September RBOB gasoline/crude oil spread to stalking the October spread. Although the October spread is trading at a discount to the September spread, it still qualifies as a short sale candidate. The ratio for the October contracts is closing in on 1.5:1. Remember, anytime the ratio hits 1.4:1 or higher it is at historically unsustainable levels.

October Gasoline Crude Oil spread daily

October Gasoline Crude Oil spread daily

We are continuing to use a two-day close below the rising 75-day Moving Average as our short sale signal. This has not occurred since late January. Furthermore, a break below a prior month’s low for the first time since early April low will alter the current bullish price structure and confirm the bearish trend change.

Trade Strategy:

Cancel the current hypothetical order in the September RBOB gasoline/crude oil spread and replace it with a new order to sell one 42,000 gallon October RBOB gasoline contract and simultaneously buy one 1,000 barrel October crude oil contract if the spread makes a two-day close below the rising 75-day MA (currently around $16.43). If filled, the spread will initially be liquidated on a two-consecutive day close 20 cents above the 2015 high that precedes the entry.

 

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