Corn/Oat Spread: The Profits In This Spread Were Harvested Today!

Corn/Oats Spread Exit

The blog initiated a hypothetical long position in the March corn/oat spread at -2 cents (premium oats) on October 8th and added another at +45 1/2 cents (premium corn) on November 13th. Originally, these were the December spreads and then they were rolled to the March contracts on November 26th.

The March corn/oat spread made a two-day close below the rising 30-day Moving Average for the first time since early October and signaled a bearish trend change. This triggered the exit signal for the entire position at today’s close of +96 1/4 cents (premium corn). The trade resulted in hypothetical profits of $4,912.50 on the initial position and $2,537.50 on the ‘add-on’ position, yielding a total profit of $7,450 on the trade (not including commissions).

March Corn Oat Spread Daily

March Corn Oat Spread Daily

The initial risk on the trade was approximately $1,337.50. In November the exit parameters were raised in order to eliminate the initial risk and lock in a trailing profit on the initial position. This gave us room to add another spread with an initial risk of approximately $1,375. So even though the position size was doubled, the biggest risk ever allowed for on the entire trade was $1,375. This was a function of trailing stop levels and only increasing the position size when the current position had a healthy open profit. Therefore, the hypothetical profit of $7,450 with a maximum risk of $1,375 produced a return of a little better than 5:1 on the trade.

What Good Trading Is All About

In our opinion, this corn/oat spread is a great example of what we consider to be a successful spread trade campaign:

First, a high-probability situation was identified (corn was trading at a discount to oats).

Second, a long position was entered only after a bullish trend change was signaled (via a close above the declining 30-day Moving Average for the first time in several months).

Next, the position size was increased only when the initial trade risk was eliminated and a new setup with a minimum reward-to-risk expectation of 3:1 was identified.

Finally, the entire position was liquidated without hesitation once a bearish trend change was signaled (via a close below the declining 30-day Moving Average for the first time in several months).

There is never any guarantee that a trade will work, of course. It’s all speculation and risk. But we have found that applying these rules consistently to each and every trade provides a positive edge over the long-term.

Advertisements

Look! Something Shiny! It’s a Platinum/Gold Spread!

Platinum/Gold Spread

Gold and platinum are two highly-correlated precious metals. However, while gold is considered a precious metal, platinum is both an industrial metal and precious metal.

Platinum Gold overlay monthly

Platinum Gold overlay monthly

The biggest source of demand for platinum is for usage in catalytic converters. So even though the prices of platinum and gold have historically been highly correlated, the variance in the fundamentals have still allowed for some price divergences. That makes for some interesting trading opportunities.

‘Even Money’ Spells ‘O-P-P-O-R-T-U-N-I-T-Y’

Platinum normally has a price premium over the gold. This is logical as platinum is fifteen times more rare than gold. However, there are occasions when the prices of the two markets are about the same or, in some cases, there have even been times where platinum is priced lower than gold.

Historically, whenever platinum traded at a discount to gold it never lasted. Sometimes it would only last for a matter of days and sometimes it would last for months/years at a time, but the platinum/gold spread ultimately reversed higher and put the premium back on the platinum market.

The Best of the ‘80s and ‘90s

In 1984 and 1985, the price of platinum stayed below the price of gold for more than a year. It ultimately turned around and platinum was at a premium of more than $250/oz. by 1986. After that, traders wised up and for the next two decades platinum would not stay at or below the price of gold for more than a few weeks at a time. Traders pounced on the opportunity whenever the spread would hit ‘even money’ so that, by the time the 1990s rolled around, there were only a few select opportunities to buy platinum at the same price as gold.

Trading In the New Millennium

Thanks to all of the disconnects and market outliers brought about during the financial crisis in ’07 and ’08, the platinum/gold spread finally made its way back to ‘even money’ again by late 2008. Anybody who paid attention and acted on the development could’ve bought a long platinum/short gold spread then and been quickly rewarded within a few weeks. If they had the patience to hold it, the spread went up nearly $600/oz. over the next year and a half. That’s a profit of nearly $60,000 on just one spread!

Platinum Gold spread monthly

Platinum Gold spread monthly

The last go-around was the craziest ride yet. In September of 2011 the platinum/gold spread once again inverted. But traders were in for a nasty surprise this time when it entered a price vacuum and plunged to a new all-time low by the end of the month. The spread continued to forge new historic lows until it finally bottomed at a record low of -$212.30 (on the weekly nearest-futures chart) at the end of the year.

The spread came up for air in the spring of 2012 as it crossed back above the ‘even money’ mark, but it then spiraled to a new record low of -$219.80 (on the weekly nearest-futures chart) in the summer. From there, a bull market was launched. The platinum/gold spread cleared the ‘even money’ mark in early 2013 and ultimately peaked at +$207.10 (on the weekly nearest-futures chart) last summer. From the 2012 summer low to the 2014 summer top, the move represented an increase of nearly $43,000 on a single futures spread (two 50/oz. platinum contracts and one 100 oz. gold contract). Once again, traders who bought the platinum/gold spread when it was inverted were rewarded with profits.

Back In the Hole

The platinum/gold spread has been in a downtrend for several months. Thanks to last week’s market mayhem when the Swiss National Bank broke the Swiss franc/Euro currency peg, gold soared on safe-haven buying and the platinum/gold spread inverted for the first time since the spring of 2013. History suggests that the foundation is being put in place for another buying opportunity.

Platinum Gold spread nearest-futures daily

Platinum Gold spread nearest-futures daily

The $64,000 question is: When should a trader get long? Now that the ‘even money’ level has been breached, the spread could easily decline to the technical support at the March 19, 2013 spike low on the daily nearest-futures chart at -$55.90 of in confluence with the Fibonacci .618 retracement on the weekly nearest-futures chart at -$56.70 (as measured between the August 2012 all-time low to the May 2014 three-year high). If the decline does not end somewhere around this level the selling could even accelerate.

Therefore, buying the platinum/gold spread right now just because it’s once again inverted could be akin to trying to catch a falling anvil. That could be a painful event, both financially and psychologically.   Perhaps it would be prudent to wait for a trend change signal first before we meddle in the metals.

Trend Change Signals

After forming a double top at the similar January and June highs last year, the platinum/gold spread began a multi-month slide. The downtrend is well-defined. Therefore, we are watching two potential setups to identify a possible bullish trend change:

First, the platinum/gold spread has closed below the declining 50-day Moving Average every single day since the month of August began. Therefore, a two-day close back above the 50-day MA could signal that the bear market is ending.

July-June Platinum Gold spread daily

July-June Platinum Gold spread daily

Secondly, the platinum/gold spread has not surpassed a previous month’s high since early June when the 2014 high was established and it has made a lower monthly low for six consecutive months. Therefore, a close above a prior month’s high would alter the price structure and confirm the bullish trend change.

Trade Strategy:

For tracking purposes, the blog will make a hypothetical trade by buying two 50/oz. July platinum futures contracts and simultaneously selling one 100 oz. June gold contract if the spread closes above the declining 50-day MA. Initially, the spread will be liquidated on a two-consecutive day close $5/oz. below the contract low that precedes the entry signal.

Feeder Cattle/Corn Spread: Setup For Another ‘Add-On’ Entry

Feeder Cattle/Corn Spread

On November 19th the blog made a hypothetical trade entry on the short side of the April feeder/May corn (x6) spread when it rallied to +$1,000 (premium feeders). We’re risking this initial position to a two-consecutive day close above +$6,000 (premium feeders).

On December 9th the blog made a hypothetical ‘add-on’ trade entry on when the April feeder/May corn (x6) spread closed at a three-month low of -$7,512.50 (premium corn). This position is being risked to a two-consecutive day close above +$2,912.50 (premium feeders).

April Feeders May Corn (x6) spread daily

April Feeders May Corn (x6) spread daily

On December 26th the spread hit a five-month low of -$20,550 (premium corn). It then bounced as high as -$10,187.50 (premium corn) on January 2nd. This bounce gives us a potential setup to add to the short position. Spread traders can add another short position on a break below the December 26th low since it would keep the pattern of lower highs and lower lows intact. Furthermore, the initial position and the second ‘add-on’ position would be showing a healthy profit.

Before adding to the position, it is a good idea to assess the minimum expected risk/reward ratio on the trade on its own merit. If a short position is entered on a break below the December low of -$20,550 and risked above the current bounce high of -$10,187.50, the minimum risk on the trade wound be $10,362.50. Let’s call it $11k.  We like to get a minimum risk/reward setup of 3:1 on any trade, so we would need to have a minimum profit expectation of approximately $33k to justify taking an ‘add-on’ with this criteria.

Feeders Corn (x6) spread monthly (continuous)

Feeders Corn (x6) spread monthly (continuous)

Historically, whenever the feeder/corn (x6) spread has surpassed -$10k (premium corn) on the upside it has ultimately reversed and gone back down to -$60k (premium corn) or lower. Most times, it has dropped to -$80k (premium corn) or lower. Therefore, a break below the December low should be followed by another $40-$60k of downside. With a ‘guess-timated’ risk of just under $11k on an additional ‘add-on’ trade and an expected profit $40-$60k if the minimum target is hit, the expected risk/reward ratio is greater than our minimum requirement of 3:1. This certainly meets our trade criteria.

Trade Strategy:

For tracking purposes, the blog will make another hypothetical trade to sell one 50,000 lb. April feeder cattle contract and simultaneously buy six 5,000 bushel corn contracts if the spread closes below the December low of -$20,550 (premium corn). Initially, this position will be liquidated on a two-consecutive day close $500 above the highest closing price in 2015 that precedes the entry on this position (currently at -$10,187.50).

Gold/Silver Spread: The Reentry Signal Was Triggered

Gold/Silver Spread

Yesterday the IMC blog made a hypothetical reentry on the short side of the April-March gold/silver (x7,000/oz.) spread when it made a two-day close below the rising 60-day Moving Average for the first time since the start of August. The position was created by selling one 100 oz. April gold contract at approximately $1,235.40 (a value of $123,540) and simultaneously buying one 5,000 oz. March silver contract and two 1,000/oz. March ‘mini’ silver futures contracts at approximately $16.99 (a total value of $118,930). This initiates a short spread position at approximately +$4,610 (premium gold). The initial liquidation trigger is a two-consecutive day close above +$9,800, which is approximately $500 above the current contract closing high.

April Gold March Silver (7,000 oz.) spread daily

April Gold March Silver (7,000 oz.) spread daily

Wouldn’t you just know it, the gold/silver spread spiked higher today during all the market chaos as Switzerland stunned the world by breaking the peg between the Swiss franc and the Euro currency.  They also cut interest rates on certain sight deposit accounts from a negative 0.25% to a negative 0.75%. The reactions in the markets were seismic as the Swiss franc spiked nearly 27% against the US dollar at one point and the Swiss Market Index plunged as much as 14%. This was the biggest decline that the Swiss stock market has experienced since 1988! There’s gotta be more than a few traders who are annoyed that the Swiss National Bank said on Tuesday that their currency peg was a “pillar of policy” and then completely abandoned that policy 48 hours later. It will be interesting to see how many hedge funds suffered major losses from today’s actions. Perhaps a few will even tap out.

The surprise for us today was that the gold/silver spread did not drop. Precious metals gained on safe-haven buying. Normally, the gold/silver spread will decline when metals move higher, but the gold market substantially outperformed silver. Of course, this was just a one-day move. We’ll see how it plays out over the next several days. Silver is currently banging against resistance between the declining 100-day Moving Average and the December high, so a strong close above this level could allow it to catch up with the gold market and crush the April-March gold/silver (x7,000/oz.) spread. Our fingers are crossed!

Gold/Silver Spread: Revision For Reentry Parameters

Gold/Silver Spread

On December 21st we issued reentry parameters for a hypothetical trade on the short side of the February-March gold/silver (x7,000/oz.) spread. With the First Notice Day for the February gold contract coming up in three weeks, it might be prudent to go ahead and use the April gold contract instead.

In the first half of December, the gold/silver (x7,000/oz.) spread broke a prior month’s low for the first time since July and altered the bullish price structure. We initiated a hypothetical short position since it also closed below the rising 50-day Moving Average for the first time since early August. This bearish trend change signal was nullified when the spread broke out to new contract highs a couple of weeks later.

Since the 50-day MA did not work, we are going to come back with a slower Moving Average to see what the current best-fit is for the April-March gold/silver (x7,000/oz.) spread. This is kind of like tuning into a radio station where we can hear the song, but we are still trying to eliminate that little bit of static that’s still there. By slowing it down to a 60-day MA, we can see that the decline into the December 10th correction low ended after the spread found support at the rising 60-day MA and scraped against it for three days straight. A new bull market high soon followed. Therefore, a two-day close below the rising 60-day MA for the first time since the first week of August would indicate that this moving average has failed. This would certainly be a good reason to take another crack at the short side.

April Gold March Silver (7,000 oz.) spread daily

April Gold March Silver (7,000 oz.) spread daily

In the event that the April-March gold/silver (x7,000/oz.) spread gets decimated in just one day, we also want to keep a fail-safe in place to get short if last month’s low is breached in just one day. This would alter the price structure and potentially set off an immediate meltdown. Not a high-probability scenario, but still a possibility. In trading, you have to have a plan for dealing for the improbable because it does happen sometimes!

Trade Strategy:

Cancel the hypothetical order to sell a the February-March gold/silver (x7,000/oz.) spread and replace it with a new hypothetical order to sell one 100 oz. April gold contract and simultaneously buying one 5,000 oz. March silver contract and two 1,000/oz. March ‘mini’ silver futures contracts if the spread makes a two-day close below the rising 60-day Moving Average (currently around +$5,211) or a one-day close below the December 10th low of +$2,691, whichever occurs first. Initially, the spread will be liquidated on a two-consecutive day close $500 above the contract high that precedes the entry signal (currently at +$9,297).

Live Cattle/Lean Hog Spread: An Exit Signal and Some Reentry Parameters

Live Cattle/Lean Hog Spread

On December 17th the IMC blog made a hypothetical trade by selling one 40,000 lb. February live cattle contract at approximately 155.82 and simultaneously buying one 40,000 lb. February lean hog contract at approximately 80.47. This opened a short spread position at 75.35.

The exit strategy was to liquidate the February live cattle/lean hog spread on a two-consecutive day close above 82.42. These parameters were triggered on December 30th when the spread closed at 83.52. This resulted in a hypothetical loss of -$3,268 on the trade.

February Live Cattle Lean Hog spread daily

February Live Cattle Lean Hog spread daily

Since it will be February in just a month, it may be prudent to look at the further out April spread in order to add a little more time to the spread for a reentry attempt. Last month the April live cattle/lean hog spread altered its bullish price structure when it traded below a prior month’s low for the first time since the mid-July correction low was established. It made a new contract high by the end of the month, creating an ‘outside bar’ with an upward reversal on the monthly timeframe. This makes the December low of 73.65 an important near-term support level. Therefore, a spread trader could use a break of the December low as a reentry signal on the short side. Since the blog is tracking the spreads with hypothetical trades, that’s exactly what we’ll do.

Trade Reentry Strategy:

For tracking purposes, the blog will make a hypothetical trade by selling one 40,000 lb. April live cattle contract and simultaneously buying one 40,000 lb. April lean hog contract if the spread closes below the December 17th low of 73.65. Initially, the spread will be liquidated on a two-consecutive day close of half a cent (50 pts.) above the contract high that precedes the entry (currently at 81.07).