Gasoline/Crude Oil Spread: Entry Signal and Bearish Trend Change

In the Tank

Yesterday the April RBOB gasoline/crude oil spread closed below the December 22nd correction low and triggered an entry signal for the blog. A hypothetical short position was initiated by selling one 42,000 gallon April RBOB gasoline contract at $1.2612 (the equivalent of $52.97-per-barrel) and simultaneously buying one 1,000 barrel April crude oil contract at $31.38. This put the entry price on the spread at $21.59.

Initially, we will risk a two-consecutive day close above $25.73. This is 50-cents above the contract high.

Favorable Charts

The chart action preceding the short sale is ideal. Recall that the spread started the year with a breakout to new highs. It then quickly retreated, signaling a failed breakout.

Furthermore, the spread breached the mid-December pullback low on Friday. This is the first time that a prior correction low has been breached. It’s another sign of a bearish trend change.

April RBOB Gasoline Crude Oil spread daily

April RBOB Gasoline Crude Oil spread daily

Hopefully, we’ve nailed the trend reversal on the first attempt. If so, we will be watching for setups to add to a short position. It would make sense to take full advantage of a winning trade and compound it. In the event that we’re wrong, our exit criterion is already in place. Now it’s up to the market to tell us whether we are right or wrong.

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