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Correlating Markets, Crude Oil and NOV

Correlating Markets, Crude Oil and NOV
January 24
23:25 2012

When trading in any financial market, everday is a different day. Trader’s should keep a fresh perspective when trading. Most new traders find this hard as they come with expectations of what the market will produce on any given day. Expectations can cause traders to lose money as their risk isn’t properly allocated to the market conditions they are trading. Rather, traders should set their expectations after doing thorough technical and/or fundamental analysis of the markets that they trade.

In one of our previous articles we discussed specific news and indicators to watch for when trading Crude Oil Futures (Symbol: CL). One of the areas mentioned was the Oil and Gas Equipment and Services industry which impacts the supply of crude oil. This article will give an example of using a stock in this industry as a correlating market that can provide a fundamental outlook when trading Crude Oil.

National Oilwell Varco, Inc (Symbol: NOV) is one of many companies in the United States that specializes in making and selling the systems, components, and products using in oil and gas drilling and production. Based in Houston, Texas, this company is in the top 10 within it’s industry by market capitalization. Person’s who trade Crude Oil futures can look to this stock as an indicator of fluctuations in the supply of oil.

Below is a side-by-side snapshot of NOV and CL on a 5 minute chart on Thursday, December 22, 2011. Both charts span 5 hours, from 10:00 am to 3:00 pm. The yellow arrow indicates that as NOV trended up, CL also trended up. Although not an exact correlation, by assessing the trend of NOV and other similar stocks, a trader would have been been able to look for a signal to enter a long position in CL.

There are times when a correlating stock will not track with a futures product, but can serve as a general indication of the state of the financial markets. This lack of correlation often occurs due to other market conditions. This could be due to major fluctions in other sectors of that industry, changes in trading volume, or other macro ecnomic conditions.

Below is another side-by-side snapshot of NOV and CL on the following day, Friday, December 23, 2011. Notice that NOV chopped sideways for the whole day, whereas CL steadily climbed higher only to have all of the all of the gains erased in a dramatic move downwards. The sideways movement in NOV would have been an indication of an unstable or slow moving market which would have helped a trader to err on the side of caution when executing and managing positions.

It is important to note, that even after doing thorough analysis the trader should understand the market can be irrational longer than they can remain solvent. Traders should compliment their strategy with multiple ways to confirm the overall market trend.

More articles on Oil?

Oil Trading Strategies

Oil’s Connection with Other Commodities

Is Oil Risky?

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