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Many traders are interested in trading the commodity markets, and for good reason – they make good trends and generate great returns. The difficulty for many is that when they start trading they lack the capital to tackle the futures markets, and some find them unapproachable. So as an alternative you could look at a stock that trades in a particular commodity. For example, Santos is an oil company, so you might follow the moves of Crude Oil futures and use that to help your analysis of Santos.
While there is some sense to this it is not as simple as it seems. There are many influences on a stock that are completely different from those on a commodity – economic pressures in the country, how well the company itself is managed, and so on. And while I would say that a Santos trader should watch what is happening with the Oil price, I think you will find, as I show below, that you can’t trade a set up on Oil by simply using Santos. In other words, you must trade each chart on its own merits.
To illustrate, take a look at the chart below on the recent market action in STO, and compare it with the second chart, which is a chart for the corresponding period of Crude Oil (CL-Spotv). Both charts have the dates of significant trend changes in 200 marked on them.
Chart 1 – Santos
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Chart 2 – Crude Oil Futures
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If you compare all the dates in these 2 charts you will see that in many cases they are not more than a day apart. You can also see that the flow of the market in Oil was much smoother than in STO. Also the tops in Oil are tops in STO, and the bottoms in Oil are also bottoms in STO. So if you were analysing Oil and could determine when the turns were happening it would definitely give you added confidence in your trading of STO.
But take a look at the run from the 21 April low in Oil to the 11 June high in Chart 2. The low actually formed a triple bottom if you look closely at the chart, and basically ran straight up without much retracement at all. In fact, it exceeded the previous range from the February low to the March top.
How would you have fared in Santos if you had tried to trade it in the same way? If you made any money at all you would have been a nervous wreck by the end of it. Look at the fall that happened in May in STO; it actually took out the April bottom.
So how could the Oil chart help you to trade STO? Well, in Chart 3 below you can see the set up in Oil at the 13 July low. The market did basically 200% off the double top and retraced 50% of the run up. This would have made you quite excited about prospects on the long side.
Chart 3 – Oil Trade Set Up
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In Santos the low came in a few days earlier, on 9 July. If you go back through earlier articles in this series I think we covered this low at some stage. It would be great to have your analysis confirmed by the set up in Oil. This is the way to use the chart of a commodity. Trade your stock on its own merits, but look for good set ups in the commodity to enhance your confidence.
Knowledge is Power!
Tim Walker
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