Here’s something that doesn’t get talked about much these days: Gasoline prices, remember those?
I think this is an interesting one. Today we’re taking a look at a daily bar chart of the United States Gasoline Fund, which is very highly correlated to RBOB Gasoline Futures. $UGA has corrected down to last October’s lows and has been trying to stabilize there for a few weeks now. Last time Gas prices were down here, they rallied over 20% in less than 4 months. Will they do it again?
As we can see in this chart, the Gas correction abruptly ended at these October lows. On May 1st $UGA made a brief lower low that quickly reversed, taking gasoline to new recovery highs. While Gas was making that lower low, momentum was already picking up. This bullish divergence, in our opinion, increases the likelihood of a rally from here. This divergence is similar to the bearish divergence that appeared at the February highs. When Gas prices rallied into Valentine’s Day, momentum was already putting in lower highs. This same warning of trouble that we got in February is what we’re seeing today, yet positive this time around.
The risk/reward makes sense, which to us is probably the most important thing. Risk management is key here because if this divergence fails and Gas prices roll over, there is a lot more down side towards last Summer’s lows around 45. So we want to see these Gas levels hold if we plan on staying on the long side.
Tags: $UGA $RB_F