Livestock Spread: Trade Parameters Revised

Feeders/Live Cattle Spread

On September 17th we had reentry parameters to short the Nov-Dec feeder/live cattle spread on a close below the August low. With several new contract highs since then and a new month starting a few days ago, the trade parameters can be revised.

We are going to move to a later delivery contract spread since the November feeder contract expires next month. Although it’s trading a dime cheaper than the soon-to-expire October contracts, the April 2015 feeder/live cattle spread is still at an historic extreme of 68.75. Also, the ratio of 1.42:1 is also at record levels.  Therefore, the April spread will be our new focus.

Trade Reentry Strategy:

The daily price data for the April feeder/live cattle spread only goes back five and a half months. However, there are currently no price breaks below a prior month’s low on the chart. This pattern is similar to the nearest-futures October spread that has not broken a prior month’s low since January. Therefore, we will use a break of the September low as a short sale signal this month. If it does not trigger by Halloween we will likely revise the trigger to a break of the October low.

April Feeders Live Cattle spread daily

April Feeders Live Cattle spread daily

The blog will make a hypothetical trade by shorting one 50,000 lb. April feeder cattle contract and simultaneously buying one 40,000 lb. April live cattle contract if the spread closes below last month’s low of 56.325. Initially, the spread will be liquidated on a two-consecutive day close .50 points above the contract high (currently 68.75) that precedes the trend change signal.

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