{"id":34002,"date":"2016-04-18T09:42:53","date_gmt":"2016-04-18T16:42:53","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=34002"},"modified":"2016-04-18T09:42:53","modified_gmt":"2016-04-18T16:42:53","slug":"rio-vs-bhp-a-very-attractive-pairs-trade-opportunity","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2016\/04\/18\/rio-vs-bhp-a-very-attractive-pairs-trade-opportunity\/","title":{"rendered":"RIO vs BHP: A Very Attractive Pairs Trade Opportunity"},"content":{"rendered":"<p><strong>(This is an excerpt from a LONG overdue article on commodities I originally published on Seeking Alpha on April 18, 2016. <a href=\"http:\/\/seekingalpha.com\/article\/3965802-rio-vs-bhp-attractive-pairs-trade-opportunity\" target=\"_blank\">Click here to read the entire piece<\/a>.)<\/strong><\/p>\n<p>Last week was a great week for a pairs trade in iron ore.<\/p>\n<p><center><\/p>\n<blockquote class=\"twitter-tweet\" data-cards=\"hidden\" data-lang=\"en\">\n<p lang=\"en\" dir=\"ltr\">I love this trade =&gt; Oil, Iron Ore &amp; Gold Correlation: A Mining Pair Trade. <a href=\"https:\/\/t.co\/dMqugRMyCd\">https:\/\/t.co\/dMqugRMyCd<\/a> via <a href=\"https:\/\/twitter.com\/barronsonline\">@barronsonline<\/a> <a href=\"https:\/\/twitter.com\/search?q=%24RIO&amp;src=ctag\">$RIO<\/a> <a href=\"https:\/\/twitter.com\/search?q=%24BHP&amp;src=ctag\">$BHP<\/a> <a href=\"https:\/\/twitter.com\/search?q=%24USO&amp;src=ctag\">$USO<\/a><\/p>\n<p>&mdash; Dr. Duru (@DrDuru) <a href=\"https:\/\/twitter.com\/DrDuru\/status\/717937028743061505\">April 7, 2016<\/a><\/p><\/blockquote>\n<p><script async src=\"\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><br \/>\n<\/center><\/p>\n<p>An article from Barron&#8217;s titled &#8220;<a href=\"http:\/\/blogs.barrons.com\/emergingmarketsdaily\/2016\/04\/06\/oil-iron-ore-gold-correlation-a-mining-pair-trade\/\" target=\"_blank\">Oil, Iron Ore &#038; Gold Correlation: A Mining Pair Trade<\/a>&#8221; caught my immediate attention when it was published on April 7, 2016. The article extensively quoted an analysis from Bernstein that proposed a pairs trade on iron ore versus oil using Rio Tinto (RIO) on the long side and BHP Billiton (BHP) on the short side. The analyst used a simple, but, in my opinion, brilliant concept to play a divergence in analyst commodity price projections and the historical correlation between these prices. At the time of the article, analyst consensus for oil prices and iron ore were extremely bullish in favor of oil. The expectations implied a substantial deviation from historical correlations.<\/p>\n<p>{snip}<\/p>\n<p>Regardless, I like the trading concept even if all the mechanical details are not readily apparent. {snip}<\/p>\n<p>{snip}<\/p>\n<p><center><br \/>\n<figure id=\"attachment_34022\" aria-describedby=\"caption-attachment-34022\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_RIO.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_RIO.png\" alt=\"Rio Tinto (RIO) held onto support at its 50-day moving average (DMA) and now faces a test of resistance at its 200DMA.\" width=\"550\" height=\"375\" class=\"size-full wp-image-34022\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_RIO.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_RIO-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34022\" class=\"wp-caption-text\">Rio Tinto (RIO) held onto support at its 50-day moving average (DMA) and now faces a test of resistance at its 200DMA.<\/figcaption><\/figure><\/p>\n<figure id=\"attachment_34021\" aria-describedby=\"caption-attachment-34021\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_BHP.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_BHP.png\" alt=\"BHP Billiton Limited (BHP) experienced a  shorter test of its 50DMA support than RIO. Like RIO, it now faces a critical test of 200DMA resistance.\" width=\"550\" height=\"375\" class=\"size-full wp-image-34021\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_BHP.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_BHP-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34021\" class=\"wp-caption-text\">BHP Billiton Limited (BHP) experienced a  shorter test of its 50DMA support than RIO. Like RIO, it now faces a critical test of 200DMA resistance.<\/figcaption><\/figure>\n<figure id=\"attachment_34020\" aria-describedby=\"caption-attachment-34020\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_VALE.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_VALE.png\" alt=\"Vale (VALE) first broke its downtrend from 200DMA resistance in March. The current streak has confirmed that breakout with the 50DMA rapidly rising now. Political developments in Brazil could be key.\" width=\"550\" height=\"375\" class=\"size-full wp-image-34020\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_VALE.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_VALE-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34020\" class=\"wp-caption-text\">Vale (VALE) first broke its downtrend from 200DMA resistance in March. The current streak has confirmed that breakout with the 50DMA rapidly rising now. Political developments in Brazil could be key.<\/figcaption><\/figure>\n<p><figure id=\"attachment_34019\" aria-describedby=\"caption-attachment-34019\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_CLF.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_CLF.png\" alt=\"Cliffs Natural Resources Inc. (CLF) looks similar to VALE and is probably equally speculative. Still, the convergence of 50 and 200DMA support make CLF an intriguing buy-the-dip trade.\" width=\"550\" height=\"375\" class=\"size-full wp-image-34019\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_CLF.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_CLF-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34019\" class=\"wp-caption-text\">Cliffs Natural Resources Inc. (CLF) looks similar to VALE and is probably equally speculative. Still, the convergence of 50 and 200DMA support make CLF an intriguing buy-the-dip trade.<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.freestockcharts.com\/platform\/v1\" target=\"_blank\">FreeStockCharts.com<\/a><\/strong><br \/>\n<\/center><\/p>\n<p>{snip} My biggest lesson came from positioning the pairs trade using options &#8211; my preferred method.<\/p>\n<p>For my first swing at this pairs trade, I started by going long RIO call options. I scaled into a BHP short position as the rally progressed. {snip}<\/p>\n<p>I will hold the short side of BHP until\/unless the stock breaks resistance the way CLF and VALE have already accomplished. I plan to buy the dips on RIO as long as I am holding the BHP short position. {snip}<\/p>\n<p>The abiding and persistent strength in the Australian dollar (FXA) motivated me to trade aggressively on the long side to this pairs trade. {snip}<\/p>\n<p><center><br \/>\n<figure id=\"attachment_34011\" aria-describedby=\"caption-attachment-34011\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDUSD.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDUSD.png\" alt=\"The Australian dollar continues to notch new multi-month highs against the U.S. dollar, strength that signals confidence in commodities. AUD\/USD broke out above the 200DMA downtrend 6 weeks ago.\" width=\"550\" height=\"375\" class=\"size-full wp-image-34011\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDUSD.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDUSD-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34011\" class=\"wp-caption-text\">The Australian dollar continues to notch new multi-month highs against the U.S. dollar, strength that signals confidence in commodities. AUD\/USD broke out above the 200DMA downtrend 6 weeks ago.<\/figcaption><\/figure><\/p>\n<p><figure id=\"attachment_34010\" aria-describedby=\"caption-attachment-34010\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDJPY.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDJPY.png\" alt=\"The Australian dollar is still struggling with the Japanese yen, a weakness that is typically a warning sign for financial markets. The spike higher from recent lows coincides with the strong surge in iron ore related plays.\" width=\"550\" height=\"375\" class=\"size-full wp-image-34010\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDJPY.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_AUDJPY-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34010\" class=\"wp-caption-text\">The Australian dollar is still struggling with the Japanese yen, a weakness that is typically a warning sign for financial markets. The spike higher from recent lows coincides with the strong surge in iron ore related plays.<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.freestockcharts.com\/platform\/v1\" target=\"_blank\">FreeStockCharts.com<\/a><\/strong><br \/>\n<\/center><\/p>\n<p><center><br \/>\n<figure id=\"attachment_34004\" aria-describedby=\"caption-attachment-34004\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_ironore_MBIOI-62-e1460775825531.jpg\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160415_ironore_MBIOI-62-e1460775825531.jpg\" alt=\"The parabolic run-up in iron ore last month predictably collapsed. So is the latest rally a last gasp for buyers, or can it last long enough to print new highs and confirm a fundamental change in sentiment?\" width=\"550\" height=\"391\" class=\"size-full wp-image-34004\" \/><\/a><figcaption id=\"caption-attachment-34004\" class=\"wp-caption-text\">The parabolic run-up in iron ore last month predictably collapsed. So is the latest rally a last gasp for buyers, or can it last long enough to print new highs and confirm a fundamental change in sentiment?<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.businessinsider.com.au\/chinese-iron-ore-miners-are-getting-crushed-by-low-prices-2016-4\" target=\"_blank\">Business Insider Australia<\/a><\/strong><br \/>\n<\/center><br \/>\n(According to Business Insider Australia, the spot price of iron ore is up 36.3% year-to-date.)<\/p>\n<p>While I do not follow oil forecasts much &#8211; oil is a heavily manipulated market where everyone seems to take turns being very wrong in their forecasts, I do follow iron ore commentary very closely. Iron ore&#8217;s lasting bear market has definitely taken its toll on market participants. {snip}<\/p>\n<p><center><br \/>\n<figure id=\"attachment_34013\" aria-describedby=\"caption-attachment-34013\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160416_IronOrePriceProjection.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160416_IronOrePriceProjection.png\" alt=\"The Australian government has very modest long-term expectations for iron ore prices.\" width=\"550\" height=\"366\" class=\"size-full wp-image-34013\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160416_IronOrePriceProjection.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2016\/04\/160416_IronOrePriceProjection-300x200.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-34013\" class=\"wp-caption-text\">The Australian government has very modest long-term expectations for iron ore prices.<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.industry.gov.au\/Office-of-the-Chief-Economist\/Publications\/Pages\/Resources-and-energy-quarterly.aspx#\" target=\"_blank\">Australian Government, Department of Industry, Innovation and Science &#8211; Office of the Chief Economist<\/a><\/strong><br \/>\n<\/center><\/p>\n<p>On April 14th, <a href=\"http:\/\/www.bloomberg.com\/news\/articles\/2016-04-14\/rio-tinto-ceo-says-iron-ore-55-rally-is-about-to-fizzle-out\" target=\"_blank\">Bloomberg published<\/a> comments from Rio Tinto&#8217;s CEO Sam Walsh that reiterated his sober near-term expectations for iron ore: <\/p>\n<p>{snip}<\/p>\n<p>The Bloomberg article included a reminder of the collective bearish expectations of analysts:<\/p>\n<p>{snip}<\/p>\n<p>It is one thing to be bearish while prices are in freefall but it is REALLY bearish when market participants do not take the bait of rising prices to end their bearish growling. {snip}<\/p>\n<p>Increasing financialization is one reason iron ore should continue to be more volatile than real business and market conditions. {snip}<\/p>\n<p>Finally, the next big test of the BHP\/RIO pairs trade should occur this week. {snip}<\/p>\n<p>Be careful out there!<\/p>\n<p>Full disclosure: short BHP shares, long BHP call options, short AUD\/JPY, short USO put and call options, long USO call options<\/p>\n<p><strong>(This is an excerpt from an article I originally published on Seeking Alpha on April 18, 2016. <a href=\"http:\/\/seekingalpha.com\/article\/3965802-rio-vs-bhp-attractive-pairs-trade-opportunity\" target=\"_blank\">Click here to read the entire piece<\/a>.)<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>(This is an excerpt from a LONG overdue article on commodities I originally published on Seeking Alpha on April 18, 2016. Click here to read the entire piece.) Last week was a great week for a pairs trade in iron ore. I love this trade =&gt; Oil, Iron Ore &amp; Gold Correlation: A Mining Pair &#8230; <a title=\"RIO vs BHP: A Very Attractive Pairs Trade Opportunity\" class=\"read-more\" href=\"https:\/\/drduru.com\/onetwentytwo\/2016\/04\/18\/rio-vs-bhp-a-very-attractive-pairs-trade-opportunity\/\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[386,4,199,62,1304],"tags":[772,308,310,631,465,309,513,676,138,418,692,1597,661],"class_list":["post-34002","post","type-post","status-publish","format-standard","hentry","category-australia","category-china","category-commodities","category-technical-analysis","category-top","tag-audjpy","tag-audusd","tag-australian-dollar","tag-bhp","tag-clf","tag-fxa","tag-fxy","tag-iron-ore","tag-japanese-yen","tag-pairs-trade","tag-rio","tag-technical-analysis","tag-vale"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>RIO vs BHP: A Very Attractive Pairs Trade Opportunity - ONE-TWENTY TWO: Trading Financial Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/drduru.com\/onetwentytwo\/2016\/04\/18\/rio-vs-bhp-a-very-attractive-pairs-trade-opportunity\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"RIO vs BHP: A Very Attractive Pairs Trade Opportunity - ONE-TWENTY TWO: Trading Financial Markets\" \/>\n<meta property=\"og:description\" content=\"(This is an excerpt from a LONG overdue article on commodities I originally published on Seeking Alpha on April 18, 2016. 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