Predicting Crude using Intermarket Analysis

Quote from illiquid:

I can understand comparing the action between crude and oil stocks, gold vs silver, corn vs wheat etc, but why extend crude comparisons to the dollar or currencies? It would be akin to studying the movement of Cheescake Factory vs IBM; sure, both will share direction when general p/e's are rising and falling, but beyond that . . . where do you draw the line between two markets that happen to coincide once in a while, vs a direct, predictive relationship?
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That is really not a good comparison. First the relationship between stocks to each other is totally different than the relationship of commodities to each other, commodities are more closely correlated. This is a global world , so if we price things in dollars what we would pay for them has a component in the value of the dollars versus other currencies, like the Euro. Let's look at this simple logic. You have 100 gallons of Gas, you live in, Germany. You want 200 Euro for it. Let's assume that the dollar is .80 Euro for our example. You would need $240 dollars for the gas. If the dollar drops to .70 Euro , you would want $260.00 , in order to get your 200 Euro. Problems in the middle east could change the value of your gas to 250 Euro and that is why the relationship between the dollar and crude does not always work.
 
Quote from Murray Ruggiero:

That is really not a good comparison. First the relationship between stocks to each other is totally different than the relationship of commodities to each other, commodities are more closely correlated. This is a global world , so if we price things in dollars what we would pay for them has a component in the value of the dollars versus other currencies, like the Euro. Let's look at this simple logic. You have 100 gallons of Gas, you live in, Germany. You want 200 Euro for it. Let's assume that the dollar is .80 Euro for our example. You would need $240 dollars for the gas. If the dollar drops to .70 Euro , you would want $260.00 , in order to get your 200 Euro. Problems in the middle east could change the value of your gas to 250 Euro and that is why the relationship between the dollar and crude does not always work.
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Well that was my point -- comparing dollars to crude is much like comparing 2 stocks in completely different sectors. In any case, when it comes to currency differences, all markets are affected by simple exchange rate changes, eg, IBM staying at $70 will fluctuate in terms of euros. But that doesn't mean there will be a predictive edge in comparing the movement of the euro vs IBM, only that you will know the price of IBM in euros will go down if the euro goes higher and IBM stays the same in terms of dollars. There is as much edge here as knowing that we're in a bull market and that most stocks will generally move higher under such conditions.

I guess my main question is: don't you need a good reason/angle in comparing 2 markets for predictive purposes, other than just slapping 2 charts over each other and saying sometimes they move together, sometimes not? Why not concentrate on markets where there is a direct logical relationship -- say, taiwanese dollar vs korean won, crude vs gasoline, Cheescake Factory vs Wendy's etc? Is it your point that there is no more edge to be found in these "obviously" correlated markets, and that now we must stretch our horizons in finding more esoteric relationships?
 
Let's continue on with our study of intermarket analysis and crude. We have the collection of data from QuotesPlus which I have available on TradersStudio.com for free. I will now use some of that data to do further analysis.

Some of the other data streams do not go back to 2000, only 2003 so our first step is to compare are results using for the same date period. Our combination which made over 70K since 2000 made, $47,450.00 since 6/9/2003 of which about $9800 on the short side

Guess which indexes and funds on this list gave use the best combinations. All of this data is available to people who have registered on our site for free.

!EXV - SELECT SPDR ENERGY INDEX
XLE - SELECT SPDF ETF
!XOI - OIL AND GAS INDEX
FSENX - FIDELITY SELECT ENERGY
FSNGX - FIDELITY SELECT NAT GAS
RYECX - RYDEX SER FUNDS ENERGY CLASS C
RYEIX - RYDEX SER TR ENERGY FUND
 
Here is my optimization. I optimize the Parameters for both variables from 2-40,2. The second parameter is the intermarket the list in order is as follows

1) !EXV - SELECT SPDR ENERGY INDEX
2) !XOI - OIL AND GAS INDEX
3) FSENX - FIDELITY SELECT ENERGY
4) FSNGX - FIDELITY SELECT NAT GAS
5) RYECX - RYDEX SER FUNDS ENERGY CLASS C
6) RYEIX - RYDEX SER TR ENERGY FUND
7) XLE - SELECT SPDF ETF

I have included the optimization report from 2003 to 5/22/2006 for this analysis. I will discuss with you in detail a little bit later on.
 

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I am really surprise we don't have more interest in predicting Crude. Maybe discussing the optimization results will get things started.


Let's discuss the optimization results a little bit. Using our first market since 2003, over 1/2 of the combination we tested in the range of 4-20 step 2, were profitable on the short side. and over 90% where profitable , combined long and short. This shows a real relationship. During the greatest bull market in crude ever to make money on the short side is amazing. This is even more impressive when you look at the rules and realize we are selling Crude when it is in an uptrend. This is a counter trend approach.

We found that only markets: FSNGX and XLE really were not robust in my analysis.
 
Quote from Murray Ruggiero:
I am really surprise we don't have more interest in predicting Crude.
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This thread has been viewed 1202 times so I think people are interested. It's just that sharing credible research in a constructive impartial manner is a departure from the usual contentious bluster found on ET. However, I'm sure the flamers are circling.

I was able to duplicate your results on TradersStudio with the SELECT SPDR ENERGY INDEX vs Crude Oil. Just eyeballing the two price series, it's hard to see how one leads the other, but I admit the Performance Summary suggests a different story. I don't know. I'll try Crude against the other indexes.

Question: How is the Intermarket Divergence Suite different from the BasicIntermarketTool that comes with TradersStudio? I mean what can I do with the Intermarket Divergence Suite that I can't already do with the BasicIntermarketTool?
 
Quote from Murray Ruggiero:

I can't post the magazine article I wrote because Futures owns the copyright. I sell my book because I pay them a royalty. Check Futures magazine site, I think they have some of them up there.

In terms of the Japanese rate hike. That would increase the value of the Yen, but that does not mean that the dollar index will decrease because of the other currencies involved. It is something that I need to think about to give you a good answer

We could develop that system. I will put it on my list of things to do on ET.
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Murray, could you ask the folks at Futures mag to make your recent articles on neural networks available as PDF files on their site?

Thank you
 
Quote from HiggsBoson:

This thread has been viewed 1202 times so I think people are interested. It's just that sharing credible research in a constructive impartial manner is a departure from the usual contentious bluster found on ET. However, I'm sure the flamers are circling.

I was able to duplicate your results on TradersStudio with the SELECT SPDR ENERGY INDEX vs Crude Oil. Just eyeballing the two price series, it's hard to see how one leads the other, but I admit the Performance Summary suggests a different story. I don't know. I'll try Crude against the other indexes.

Question: How is the Intermarket Divergence Suite different from the BasicIntermarketTool that comes with TradersStudio? I mean what can I do with the Intermarket Divergence Suite that I can't already do with the BasicIntermarketTool?
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Thank you for your support. I have always tried to share some of my quality research and often times I get attacked by consultant in this industry who are upset I am sharing tool of the trade. The internet makes doing this easy because they can hide behind an alias.

The Intermarket Divergence Suite is a much more powerful set of tools. First it has tools to allow you to filter trades based on correlation analysis. You can also filter both entry and exit signals by typing in a line of code as a parameter. In addition you can also not only test entering at the market but also using opening range breakout.You can test two intermarket versus the market you are trading. Since you can do all this by changing parameters, it lets you write a reasonably complex intermarket system without any coding.
 
It's more than XLE/$XOI to look at.
In my opinion one should look at the other commodities and compare them to crude oil for divergence. HG, GC, SI, HG, HU, HO.
Now has been the the driving-season over there, and HU is important.
And then you have the futures, the prices in 2009, 2010, 2011 for crude oil.

Good luck.

Tyren
Norway(we found oil in late 1960's, never looked back since... but production are going down now and we are empty in 20 years time or so)
 
I have decided to optimize our original data series against not only Crude but also , Heating oil and Unleaded Gas. We found that Heating oil gave us the best bang for the buck. Using the same parameters with EXV as with Crude 40,25. It produced $103,761 and had a drawdown of $11,369.00.

In addition the equity curves correlation of these very similar markets is not as high as you would think. If we look at Crude and Heating oil it is high but not extremely high. It is .59 on a monthly basis. Heating oil and Unleaded Gas have a higher correlation at .77 on a monthly basis.
 
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