Platinum/Gold Spread: The Exit Signal and Reentry Parameters

Platinum/Gold Spread

On March 6th a buy signal was triggered for the July-June platinum/gold spread when it closed above the declining 50-day Moving Average for the first time since July and cleared a previous month’s high for the first time since early June. The blog initiated a theoretical long position at -$4.80 (premium gold).

On March 18th the position was liquidated at -$57.60 (premium gold). This is because the spread closed more than $5/oz. below the Groundhog’s Day contract low for two-consecutive days. The theoretical loss on this trade was -$5,280 per spread. Ouch!

July-June Platinum Gold spread daily

July-June Platinum Gold spread daily

The new contract low of -$57.60 (premium gold) sent the July-June platinum/gold spread just below key technical support at the March 19, 2013 spike low on the daily nearest-futures chart at -$55.90 and the Fibonacci .618 retracement of the entire run from the August 2012 all-time low to the May 2014 three-year high at -$56.70 (premium gold). If the bear market does not end right here, we could be looking at the psychological -$100/oz. mark for the first time in over two years.

Regardless of the fact that the initial buy signal failed, history indicates that the platinum/gold spread is still a great buy at or below the ‘even money’ mark. The spread has been below ‘even money’ for more than two months straight. Therefore, spread traders should reload and get ready for a reentry signal.

A two-day close above the declining 50-day Moving Average for the first time since last summer (the March 6th close above the 50-day MA was a one-day event) or a trade above the March 6th peak at -$4.80 (premium gold) could put the spread back on track for a major trend change. Therefore, traders can use either event as a new buy signal.

Trade Reentry 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 makes a two-day close above the declining 50-day MA or a one-day close above the March 6th peak. If filled, the spread will be liquidated on a two-consecutive day close $5/oz. below the contract low that precedes the entry signal.

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Hog/Corn Spread: Exit Strategy Update

Lean Hog/Corn Spread

On October 14th the IMC blog entered a short position in the April-May hog/corn spread at approximately +$17,850 (premium hogs). Initially, the exit criterion was to liquidate on a close above +$20k and reverse to a long position as per a reversal system.

Historically, the few times when the hog/corn spread reached +$15k it ultimately rolled over and sank to +$1k or even lower. It seems the spread is following this same script again. Just last week the April-May hog/corn spread touched a new contract low of +$5,495, which is the lowest price that the nearest-futures spread has seen since the spring of 2013. It would not take much for the spread to hit the +$1k level from here.

April Hog May Corn spread daily

April Hog May Corn spread daily

After establishing a double top between the July and October highs, the April-May hog/corn spread has been trending lower as it has made progressively lower lows and lower bounce highs. The spread has also closed below the declining 50-day Moving Average every day since mid-November. This is a well-defined downtrend. Therefore, traders can adjust the exit level to lock in a sizable profit. If the hog/corn spread makes it to the ‘even money’ level we will then discuss potential trade opportunities on the long side.

Trade Strategy:

On the short position in the April-May hog/corn spread, change the exit signal from a close above +$20k to a two-day close above the declining 50-day Moving Average (currently around +$8,743).

Cattle Crush Spread: Exit Strategy Amendment

Cattle Crush Spread

The IMC blog is holding hypothetical long positions in the August-April-May 6:3:2 cattle crush spread. The initial position was entered at -$10,860 (premium the sum of the feeders and corn) On October 27th and an ‘add-on’ position was entered at -$350 (premium the sum of the feeders and corn) On February 23rd.

The first position was being risked to a two-consecutive day close below -$20,750 and the ‘add-on’ position was being risked to a two-consecutive day close below -$10k. But based on the current price action, we are going to amend the exit strategy.

Aug-April-May 2015 Cattle Crush spread daily

Aug-April-May 2015 Cattle Crush spread daily

The August-April-May 6:3:2 cattle crush spread did close below -$10k for two days, but we are going to give it a few more days of trade before exiting the ‘add-on’ position. The reasons for the change are four-fold:

First, the spread dropped for seven-consecutive days. This nearly matches the eight-consecutive day decline into the October 3rd low, which was followed by a complete recovery over the next several weeks.

Second, the seven-day decline knocked $14,362.50 off the August-April-May 6:3:2 cattle crush spread. This is remarkably similar to the $14,660 decline over the eight-day period into the October low, indicating that it may be very oversold here.

Third, in just over a month’s time the spread has retraced two-thirds of the four-month rally from the contract low to the February peak. Markets often reverse course after a retracement of either side of two-thirds of the preceding run. This phenomenon is exhibited by the adherence to the Fibonacci .618 (62%) retracement levels across many different asset classes on multiple timeframes.

Fourth, while this spread is in negative territory (the sum of the live cattle is discounted to the sum of the feeders and corn), the nearest-futures spread has the live cattle trading at a huge premium. This implies that the further out spread may be steeply underpriced.

Nearest-futures Cattle Crush spread monthly

Nearest-futures Cattle Crush spread monthly

While we have a set of trading and risk management criteria for the spreads, there are times when a market move requires some flexibility. This may just be one of those times, so we are going to keep a close eye on things for a few days and see how this plays out.

Platinum/Gold Spread: The Long Entry Signal Was Triggered

Platinum/Gold Spread

On Friday the July-June platinum/gold spread closed above the declining 50-day Moving Average for the first time since July. The spread also surpassed a prior month’s high for the first time since early June, which was when the 2014 high was established. This signaled a bullish trend change.

July-June Platinum Gold spread daily

July-June Platinum Gold spread daily

The trend change triggered a hypothetical trade for the blog on the long side of the spread. The trade would have been entered by buying two 50/oz. July platinum futures contracts at approximately $1,160.60 and simultaneously selling one 100 oz. June gold contract at approximately $1,165.40. Therefore, the long position was entered at -$4.80 (premium gold). Initially, the spread will be liquidated on a two-consecutive day close below -$52.80 (premium gold).

We will now be watching the spread to see what sort of volatility it experiences and what sort of chart patterns emerge. If we are lucky, the spread may lend itself to some setups for adding to the position as the new bull market unfolds.