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).

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