While crude oil has been trading near its lowest price in a month, oil services stocks look bullish, so Greg Harmon of Dragonfly Capital offers a pairs trade idea.
Oil services stocks (OIH) have looked good as a group lately, especially the large-cap names. But with a volatile market, it has been difficult to find the right entry without getting stopped out. One way to deal with this is to enter using a pairs trade.
A ratio that I track, the oil services ETF (OIH) against the United States Oil Fund (USO) offers a good trade opportunity. The ratio below shows a breakout of the blue box of consolidation and some separation from the 61.8% Fibonacci retracement of the fast move lower in 2011.
The next Fibonacci levels at 1.415 and then 1.478 are good initial targets. The relative strength index (RSI) is supportive of a move higher and the moving average convergence divergence indicator (MACD) looks to be ready to turn higher in support as well.
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Using 100 shares of OIH long against each short 135 shares of USO with a stop on the ratio below 1.31 gives a reward to risk ratio of 2.5:1 to just the first target. Put another way, this trade nets $250 at 1.415 vs. a loss of $100 if stopped out.
By Greg Harmon of Dragonfly Capital
