by MoneyMiser21
Beloved Slope of Hope member Market Sniper (aka Dutch to those who knew him) persistently promoted the search for, and trading of, edges. He shared quite a few with fellow readers over the years, including the end of day ramp trade, and his Nadex trade setups. It is in that light that I share with you an interesting discovery that I’ve been forward watching for quite a while.
Now some of you may know that whenever the subject of USO gets posted about on our site, you’ll soon enough see me respond that it’s far simpler to trade HES instead.
You’ll find Hess (NYSE:HES) tracks very closely with CL, and you’ll face none of the problems that USO poses (such as the mixed futures contract make-up, roll costs drag, and tax complications involved with trading the ETN).
But about a year ago while looking over charts, I noticed something rather unusual about the relationship between HES and CL (the continuous contract).
Hess can be used as a leading indicator for oil!
Shocking, I know. Usually it’s the other way around for commodity based stocks. And it’s not just day trade setups. Swing traders can use this as well! First, let’s break down the two set-ups:
1. HES as a leading indicator for next day’s CL candle (total day’s range)
This day trade uses the daily chart candles on Hess to project a bullish or bearish bias for the following day’s CL price action.
Be warned, this is not an everyday set-up. It only potentially triggers on 3-bar pivots.
Bullish setup—HES daily chart makes a 3-bar pivot low where:
- The left candle has a higher low than the center candle
- The right candle makes a higher low than the center candle
- AND the CL right daily candle makes a lower low than the center candle
The most recent example of this set-up took place this past Wednesday, Sept. 22.
You should note the following in the chart above:
- HES daily candle for Tuesday, Sept. 21 made a higher low by 2c versus Monday’s candle (green arrows bottom half of chart), and Monday’s candle made a more obvious lower low from the Friday, Sept. 17 candle.
- CL daily candle for Tuesday, Sept. 21 made a lower low than Monday’s candle (Red arrows top half of chart), creating a divergence with HES price action.
- This puts you on alert for Wednesday’s price action in CL to be bullish, and more likely end trade higher than where it opens.
- Sure enough, price action traded bullish, broke Tuesday’s high, and even closed above Tuesday’s high.
Bearish Set-up – HES daily chart makes a 3-bar pivot high where:
- The left candle has a lower high than the center candle
- The right candle makes a lower high than the center candle
- AND the CL right daily candle makes a higher high than the center candle
The most recent example of this set-up took place on Aug. 31.
- The HES daily candle on Aug. 30 put in a lower high versus the prior candle from Aug. 27 by 19c (Red arrows lower half of chart), and that Aug. 27 candle made a higher high versus the Thursday, Aug 26 candle.
- CL daily candle for Aug. 30 put in a higher high versus the Friday, Aug. 27 candle (green arrows top half of chart), creating a divergence.
- This puts you on alert for Tuesday’s price action in CL to be bearish, and more likely end trade lower than where it opens.
- Sure enough, Tuesday, Aug. 31’s price action in CL proved bearish.
Since the beginning of 2020, the overall success of these two set-ups combined produced a record of 38 correctly predicted following day’s CL trading direction, and 15 incorrect. That’s a better than 71.5% prediction rate.
2. HES as a leading indicator for CL swing and position trading
Hess shockingly also gives useful leading trade signals for swing and position trading.
This uses the principle of relative strength (not the RSI “indicator”), only it’s inverted because usually the commodity is used for the leading signal.
Take a look at this daily comparison chart. The CL continuous contract is on the top half, with HES on the bottom.
In Mid-September 2019, both Hess and CL made new swing highs. Then a month and a half later, HES made a new swing high on Nov. 8, 2019, while CL had yet to surpass its high from September. That set-up a bullish divergence, and CL would go on to make a new swing high on Jan. 3, 2020.
Ironically that same new swing high for CL set-up a bearish divergence. You should note that as CL made that new swing high in early January 2020, HES failed to make a new swing high, creating a bear divergence. This preceded the great bear crash of April 2020 in CL.
More recently, the bear divergence in HES from CL in late June-early July 2021 preceded the more than 20% drop in oil’s price after July 4. Note as CL made a higher swing high from June 23 to July 6, HES made a lower high. Oil’s price action then sold off down to its mid-August low.
You’ll note that as of the close of Friday, Sept. 24, CL is re-testing its prior swing high from July 30, while HES is still lower than its July 29 swing high.
We’ll see how this divergence plays out. Seasonality would suggest lower CL prices are ahead.