Livestock Spread: Trade Signal Triggered

Feeders/Live Cattle Spread

On August 21st a short sale signal for the Nov-Dec feeder/live cattle spread was triggered. Theoretically, the blog would have sold one 50,000 lb. November feeder cattle contract at 207.35 and bought one 40,000 lb. December live cattle contract at 148.60 for a spread of 58.75 (premium feeders).

November Feeders December live cattle spread daily

November Feeders December live cattle spread daily

Today the short position would have been liquidated at a loss since the Nov-Dec feeder/live cattle spread made a two-consecutive day close above 64.80. Based on today’s close, the November feeder cattle contract would have been bought back at 225.60 and the December live cattle contract would have been sold at 160.00 for a spread of 65.60 (premium feeders). The theoretical loss on the trade would have been approximately -$4,565 per spread (a loss of -$9,125 on the feeder contract and a profit of +$4,560 on the live cattle contracts).

Trade Reentry Strategy:

Although shorting the break below the 50-day Moving Average was a losing proposition, the fact remains that the Nov-Dec feeder/live cattle spread is still a candidate for a short sale.

One thing that did not change is the price structure. The Nov-Dec feeder/live cattle spread just made a higher monthly high for the eighth consecutive month and it has not yet breached a previous month’s low since early February.

The blog will make a hypothetical reentry trade by shorting one 50,000 lb. November feeder cattle contract and simultaneously buying one 40,000 lb. December live cattle contract if the spread closes below the August low of 57.925. Initially, the spread will be liquidated on a two-consecutive day close .50 points above the contract high (currently 65.60) that precedes the reentry signal. If the trade does not trigger by the close on September 30th, the reentry criteria will be raised to selling a close below the September low.

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