Lean Hog/Corn Spread
Yesterday the spread between the value of one April lean hog contract and one May corn contract closed at +$17,850. The close below the rising 30-day Moving Average for the first time since late August signaled a bearish trend change. This triggered an entry signal on the short side.
The blog initiated a hypothetical trade to sell one 40,000 lb. April lean hog contract and simultaneously buy one 5,000 bushel May corn contract at +$17,850 (premium hogs). Initially, the exit strategy is to liquidate the spread on a close above +$20k (premium hogs). Furthermore, a close above +$20k (premium hogs) will also trigger a buy signal to initiate a long spread position. This is because the blog is using a reversal system that keeps us always in the market, long or short. Closings above +$20k trigger buy signals and closings below +$18k trigger sell signals.
A quick glance at the daily chart suggests that a double top is forming between the July 22nd high of +$19,395 and the slightly higher October 6th high of +$19,512.50. The lowest point between these two highs was the August 14th correction low at +$14,517.50. A break below this level will officially confirm the double top pattern.
Historically, the few times when the hog/corn spread reached +$15k or higher it eventually petered out and plunged to +$1k or lower. Although it is not a guarantee that this will happen again, it does give us a guideline for possible price target. This can come in handy when assessing the potential risk/reward on any trade setups that may allow a trader to add to the current short position. Let’s monitor the April-May hog/corn spread closely to see if any ‘add-on’ opportunities arise.