Livestock Spread: Trade Parameters Revised

Feeders/Live Cattle Spread

Previously, we were working a hypothetical order to short the April feeder/live cattle spread on a break below the September low. We started a new month this week. The spread has not yet breached support at a prior month’s low since the data for this spread started in April of 2014. Therefore, we can go ahead and raise the short sale level on this trade.

April Feeders Live Cattle Spread daily

April Feeders Live Cattle Spread daily

Last month was a quiet one for the April feeder/live cattle spread. It did not trade above the prior month’s high or the prior month’s low. Currently, the spread is testing last month’s high. If it breaks through, the October 3rd contract high of 68.75 could soon be matched.

Our main focus, however, is the price support for the uptrend. The October low of 59.95 and the November low of 61.15 set a support zone for the April feeder/live cattle spread that, if breached, could end the bull market and start a major decline. Therefore, we are going to bump our entry parameters up to just below this support zone.

April Feeders Live Cattle Ratio daily

April Feeders Live Cattle Ratio daily

The April feeder/live cattle ratio looks pretty enticing on the charts as well. The October and November lows were both at 1.36:1 and the ratio has already surpassed the November high. This confirms a double bottom low at the October and November lows. If the ratio cracks 1.36:1 it will signal a failure of the bullish pattern. We’ll take this kind of pattern failure as a short sale signal any time!

Trade Reentry Strategy:

The IMC 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 the October 30th low of 59.95. 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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