Cattle Crush Spread: Trade Signal Triggered

Cattle Crush Spread

On September 17th a buy signal was triggered for the cattle crush spread (long six 40,000 lb. August 2015 live cattle contracts, shorting three 50,000 lb. April 2015 feeder contracts, and shorting two 5,000 bushel May 2015 corn contracts). Theoretically, the blog initiated a long position at -$8,000 (premium the sum of the feeders and corn).

On October 2nd the position would have been liquidated at a loss since the spread made a two-consecutive day close below -$12,500. The spread closed at -$19,425 so the theoretical loss on the trade would have been a whopping -$11,425 per spread.

Trade Reentry Strategy:

The break to new contract lows put the cattle crush spread below the nearest-futures 2011 and 2012 lows of -$17,597.50 and -$18,150.00, respectively. The 2012 is the lowest price in 45 years of price data. History shows that this inversion never lasts. So despite the recent collapse, we would be willing to get back in if price action warrants it.

August-April-May Cattle Crush spread daily

August-April-May Cattle Crush spread daily

The 2015 August-April-May 6:3:2 cattle crush spread has not closed above the declining 30-day Moving Average since mid-August. Therefore, a close back above the 30-day MA (around -$8,700 on Monday) would signal a possible bullish trend change.

The blog will make a hypothetical reentry trade by purchasing six 40,000 lb. August 2015 live cattle contracts and simultaneously shorting three 50,000 lb. April 2015 feeder contracts and shorting two 5,000 bushel May 2015 corn contracts if this 6:3:2 cattle crush spread closes above the 30-day MA. The position will be liquidated on a two-consecutive day close $500 below the contract low that precedes the entry price.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s