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Anyone who has attended the Hot Commodities Summit in 2008 or 2009 would be aware of the profit potential of trading commodity futures. However, for many, particularly new traders, futures can seem inaccessible, perhaps because they require more capital, or perhaps simply because they are too confusing.
One way to get around this situation is to look for stocks which are strongly related to a particular commodity. Of course, if you have a favourite stock, you can do this in reverse – find the commodity that is most closely related to it. Since Santos (STO:ASX) is an oil company, we could look to compare its price movements with the price of Oil.
The easiest way to do this is through the Crude Oil Futures chart (CL-Spotv in ProfitSource). Using the Overlay Chart option, you can compare the performance of the two. First let us do this on a Monthly Chart.
Chart 1 – Santos and Oil Monthly Chart Overlay
click to enlarge
The reason for starting with a long-term picture like this is that we can see the broad movements and get a better comparison of relative prices. The software will automatically scale the charts so that the lowest price appears at the bottom of the chart and the highest at the top. Thus it does not enable us to compare percentage movements.
To illustrate, the lowest price of Santos on this chart is the 1992 low of $2.10. The highest is $20.63 in 2008. This is a 1000% increase in price. The lowest price of Oil is the 1998 low of $10.75 and the highest $147.27. This is a 1400% increase in price. However on the chart they appear to be the same.
What we can tell from this chart is that there have been considerable periods of time when Santos has been moving in the general direction of the price of Oil. On the other hand, in the second half of 2008, Oil fell much more heavily than Santos did, showing that this stock was holding up well in that bear market.
Next look at the Weekly Chart.
Chart 2 – Weekly Chart Comparison
click to enlarge
Note how the 2008 falls appear different in this chart, because the time period is different and therefore the scaling produces a different appearance. The information from this comparison again shows that there are generally similar moves in prices, but with important differences.
The peak in Santos in 2008 came slightly earlier than that for Oil. Santos finished its down run sooner, making a low in October, as opposed to Oil whose lows were in December and February. Currently we see Santos making lower tops while Oil was still advancing, suggesting there might be some falls in Oil, as Santos has been leading Oil by 1-3 months.
Finally there is the daily chart.
Chart 3 – Daily Chart Comparison
click to enlarge
On the smaller time frame you can see that there is less symmetry between the two markets. While Oil tends to make its moves in fairly consistent trends, Santos is choppier. For example, from the 2008 highs, Oil fell steadily to the end of the year, tracked sideways between December and February, and then headed steadily up. Santos fell from June to August, had a rally to early October, fell off a precipice and then slowly worked higher, although hardly consistently.
Thus you can see where this type of comparison can help you in your trading and where its usefulness is limited. The more work you do with this, the more you will discover.
Knowledge is Power!
Tim Walker
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