Platinum/Gold Spread: Updated Reentry Parameters

Platinum/Gold Spread

Currently, the blog is working a hypothetical order to buy the July-June platinum/gold spread on a two-day close above the declining 50-day MA or a one-day close above the March 6th peak. With a new month starting tomorrow, we are going to move a little further out in the gold and use the August contract. Also, we think there’s room to finesse the entry parameters just a bit for a better setup.

Back in early March the platinum/gold spread closed above the declining 50-day Moving Average for the first time since July and exceeded a prior month’s high for the first time since early June. This signaled a trend change and elected our (hypothetical) parameters for entering a long position. Less than two weeks later, the spread plunged to a new contract low and elected the liquidation parameters.

New Parameters

Since the 50-day MA didn’t work, let’s use the slower 75-day MA to gauge the trend. The July-August platinum/gold spread has not closed above the 75-day MA since early August. Coincidentally, it just so happens that the 75-day MA (currently at -$34.20) is in close proximity to the April high of -$34.90 (the spread has only surpassed a prior month’s high once in the last ten months).

July Platinum August Gold spread daily

July Platinum August Gold spread daily

Therefore, a close above these two markers could alter the bearish price structure and trigger a bullish trend change signal worth taking for a reentry. After all, platinum has been trading at a discount to gold for three and a half months now. This can’t go on forever.

Trade Reentry Strategy:

Cancel the current order in the July-June platinum/gold spread and replace it with a new order to buy two 50/oz. July platinum futures contracts and simultaneously sell one 100 oz. August gold contract if the spread closes above the April high of -$34.90 (premium gold). If filled, the exit on a two-consecutive day close $5/oz. below the contract low that precedes the entry signal.

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Australian Dollar/New Zealand Dollar Spread: From Down Under To Up And Over?!

Australian Dollar/New Zealand Dollar Spread

As most people would expect, the Australian dollar and the New Zealand dollar are highly correlated. This makes sense because they are trading partners with a very close geographical proximity. New Zealand exports a ton of stuff to Australia, so the Kiwi economy usually mimics the Aussie economy.

Australian Dollar New Zealand Dollar overlay weekly

Australian Dollar New Zealand Dollar overlay weekly

The two currencies have basically moved in lock-step with each other for the last three decades (the Australian dollar became a free-floating currency in 1983 and the New Zealand dollar became a free-floating currency two years later in 1985). Although the Kiwi generally rides on the coattails of the Aussie dollar, interest rate differentials can sometimes allow the Kiwi to outperform.

The Commodity Connection

The Australian dollar and the New Zealand dollar are often referred to as ‘commodity dollars’ since they have a strong link to commodities. In particular, the Australian dollar has close ties with the gold market since Australia is the world’s third-largest gold producer.

Australian Dollar Goldman Sachs Commodity Index overlay weekly

Australian Dollar Goldman Sachs Commodity Index overlay weekly

When you look at the last couple of decades of commodity prices as represented by the Goldman Sachs Commodity Index, you can see that the overall price trends are the same and the major turning points are often synched up together. If one can identify where commodities are going, the Aussie dollar can be traded as a proxy.

Down Under, Way Down Under

Both as a ratio and a spread, the difference between the Australian dollar and the New Zealand dollar has reached an extreme low. On April 3rd the Aussie dollar had a minuscule premium of roughly one-third of a cent over the Kiwi dollar. The difference between the two currencies was nearly 1:1 in ratio terms.

Australian Dollar New Zealand Dollar spread weekly

Australian Dollar New Zealand Dollar spread weekly

This is the closest in price that these two currencies have been in at least a decade and a half. It’s not very common. The Aussie usually has a premium of a dime or more over the Kiwi. Most likely, the multi-year bear market in commodities is a main driver in the Aussie/Kiwi spread collapse.

Current Market Situation

We’re at an interesting juncture here. First of all, the Australian dollar/New Zealand dollar spread it at an extreme low. History indicates that this won’t last, so spread traders should have been watching closely for a reversal signal.

September Australian Dollar New Zealand Dollar spread daily

September Australian Dollar New Zealand Dollar spread daily

That reversal may have happened this week. The September Australian dollar/New Zealand dollar spread made a two-day close above the declining 50-day Moving Average for the first time since the first week of November. Traders now have a green light to start getting long.

Secondly, the commodities bear market into the Q1 lows is the longest commodities bear market in the last 115 years and the size of the decline is the fifth or fourth-largest in history, depending on which commodity index you’re looking at. Now that the rubber band has been stretched this far for this long, the odds are that commodities are overdue for a sizable reversal and a new bull market. So goes commodities, so goes the Aussie dollar and so goes the Australian dollar/New Zealand dollar spread.

Goldman Sachs Commodity Index Daily

Goldman Sachs Commodity Index Daily

In mid-April the Goldman Sachs Commodity Index closed above the declining 100-day Moving Average for the first time since early July and surpassed the Q1 high. Today the DJ-UBS Commodity Index closed above the declining 100-day Moving Average for the first time since June. Another 2% higher and this index will surpass its Q1 high as well. This very well could be the start of a new bull market in commodities. If so, the probabilities are extremely favorable that the Aussie will make a spectacular recovery. So should the Aussie/Kiwi spread.

Finally, the US dollar index posted a multi-year high last month. It was on a Friday the Thirteen, no less! The ten-month run that got it there increased the value of the greenback by 27%. This is the second-largest and second-longest run in over three decades of price history. The US dollar index often has a negative correlation with commodities, so the soaring greenback and simultaneous plunge in commodities is not a surprise to anyone.

US Dollar Index (cash) Daily

US Dollar Index (cash) Daily

With this week’s upside breakout in the Aussie/Kiwi spread and the bullish trend change in the commodity indices, it is certainly fitting that the US dollar index triggered a bearish trend change this week as well. On the daily timeframe, the greenback made a two-day close below the rising 50-day Moving Average for the first time since early July. The long-term timeframe caught up with the reversal signal today when the buck cracked the March low. Over the last ten months, the dollar has only broken a prior month’s low on one occasion and it was a mere one-tick infraction. Today’s price break altered this price structure and confirms the bearish trend change from the daily timeframe.

There’s a saying that things happen in three’s. This week’s simultaneous trend changes in the Australian dollar/New Zealand dollar spread, the commodity indices, and the US dollar index certainly counts for that. The problem is that it happened with such gusto that a counter-trend move could happen before we go into the weekend and the new month. But one man’s misfortune can be another man’s fortune. So instead of buying the breakout right here, our opinion is that a trader may want to initially look for some sort of pullback to establish a long position.

Now that it has been broken, the 50-day Moving Average (currently around 2.62 cents) becomes new technical support for the September Australian dollar/New Zealand dollar spread. Coincidentally, a Fibonacci .382 retracement of the recent rally from the contract low is at 2.64 cents. Therefore, buying a pullback into this confluence of technical support might be a good way to get the ball rolling.

Trade Strategy:

For tracking purposes, the blog will make a hypothetical trade by buying one 100,000 (AD) September Australian dollar contract and simultaneously selling one 100,000 (NZD) September New Zealand dollar contract at a spread of 2.60 cents (premium Aussie). Initially, the spread will be liquidated on a two-consecutive day close below 0.60 cents (premium Aussie).

Soy Meal/Bean Oil Spread: Exit May Spread And Set Parameters For The December Spread

Soy Meal/Bean Oil Spread

Back in November, the IMC blog decided that a reversal system might be a good way to capture a move in the soy meal/bean oil spread. On the one hand, both the spread and the ratio between these two soy products reached extremes that have only been seen a dozen times or less in the last half century. Historically, this made it a great trade candidate on the short side.

On the other hand, the March soy meal/bean oil spread was sitting less than $1,000 away from its contract high. A breakout to new contract highs could have cleared the path for the spread to return to the prior nearest-futures top, which was another $10k higher. Therefore, we figured that a breakout on either side could lead to a move of several thousand dollars.

The reversal parameters were simple: Buy the soy meal/bean oil spread on a close above +$17k and sell the spread on a close above +$15k. Reverse positions anytime the alternate price level is triggered.

Where We Are, Where We’re Going

Currently, the blog is holding a hypothetical short position in the May soy meal/bean oil spread entered at the equivalent of +$13,164 (premium meal) on November 19th. This is noticeably below the $15k threshold that would have triggered the short sale. The reason for this is because of the backwardation where the further out spreads are trading at a discount to the closer delivery spreads. This has caused our equivalent entry price to drift.

May Soy Meal Bean Oil spread daily

May Soy Meal Bean Oil spread daily

The First Notice Day for the May grain contracts is on Thursday, so we need to roll the spread position. Instead of doing a straight rollover, we are going to change things up just a bit.

December Soy Meal Bean Oil ratio daily

December Soy Meal Bean Oil ratio daily

With the exception of the mid-September/early October plunge, the soy meal/bean oil spread has really been stuck in a wide trading range for the last eleven months. The new crop December spread set a contract high of +$14,854 on November 14th and the lowest it has been since then was +$11,596. For the last several months, the ratio has been flip-flopping back and forth over 1.7:1 and the spread has been flip-flopping back and forth over +$13k. In the past, whenever the nearest-futures ratio reached 2:1 or higher and reversed, it eventually declined to 1:1. Therefore, the December spread still has plenty of downside potential.

Soy Meal Bean Oil ratio monthly

Soy Meal Bean Oil ratio monthly

So here’s what we are going to do: Let’s liquidate the May soy meal/bean oil spread and call it a day. We will then set up new reversal system parameters for the new crop December spread. Since the December spread is trading at a lower price than the spring contracts, the $17k and $15k reversal levels are not ideal. Therefore, we will adjust the parameters to +$15,500 for the buy point and +$13,500 for the sell point. This puts the buy point several hundred dollars above the current contract high and the sell point at a price that the spread has had no trouble reaching over the last year.

December Soy Meal Bean Oil spread daily

December Soy Meal Bean Oil spread daily

The spread is quite a bit below the sell level right now, so we will have to wait for a rally to initiate the short position and get the reversal system activated again.

Trade Strategy:

For the short May soy meal/bean oil spread at the equivalent of +$13,164 (premium meal) on November 19th, exit right here at +$12,824 or better.

Also, implement a reversal system for the December soy meal/bean oil spread. Sell one 100-ton December soy meal soy meal contract and simultaneously buy one 60,000 lb. December bean oil contract if the spread rallies to +$13,500 (premium meal). Exit the short position and reverse to a long position on a close above +$15,500 (premium meal) and keep the reversal system parameters in place to reverse and go short again on a close back below +$13,500.

Gasoline/Crude Oil Spread: The Liquidation Parameters Were Elected. Prepare To Reenter.

RBOB Gasoline/Crude Oil Spread

On April 7th the blog entered a hypothetical short position in the August RBOB gasoline/crude oil spread at $20.00 (premium gas). The trade was being risked to a two-consecutive day close above $22.00 (premium gas).

August Gasoline Crude Oil spread daily

August Gasoline Crude Oil spread daily

On April 24th the spread closed at $22.81, which was the second day above the $22 mark. This triggered the exit criteria. Therefore, the August RBOB gasoline/crude oil spread would have been liquidated with a theoretical loss of -$2,810 per spread.

With four trading days left for the month, the nearest-futures RBOB gasoline/crude oil ratio is poised to close above 1.4:1 (on a monthly closing-basis) for the third month in a row. This will match the record three-month duration. It may even set a new record high!

Gasoline Crude Oil ratio monthly

Gasoline Crude Oil ratio monthly

Historically, every time the ratio has made a month-end close above 1.4:1 and then finally turned over, it would head all the way back down to 1.15:1 or lower. Therefore, it is still a prime candidate for a short sale. Knowledgeable spread traders should be looking for reentry signals.

Trade Reentry Strategy:

For tracking purposes, the blog will make a hypothetical trade by selling one 42,000 gallon August RBOB gasoline contract and simultaneously buying one 1,000 barrel August crude oil contract on a close below the April 8th correction low of $18.67. Initially, the spread will be liquidated on a two-consecutive day close 20 cents above the highest closing price after April 23rd.

Feeder Cattle/Corn Spread: Liquidate The Position For Now

Feeder Cattle/Corn Spread

The IMC blog initiated a hypothetical short position in the April feeder/May corn (x6) spread at +$1,000 (premium feeders) on November 19th. An ‘add-on’ position was entered at -$7,512.50 (premium corn) on December 9th.

The Last Trading Day for the April feeder contract and the First Notice Day for the May corn contract both occur next Thursday. Therefore, traders will need to exit the spread position.

April Feeders May Corn (x6) spread daily

April Feeders May Corn (x6) spread daily

We are now monitoring the summer delivery contracts for new trading opportunities. The ratio between the value of an August feeder contract and the value of a July corn contract is at 5.78:1 today. Recall that the feeder/corn ratio has always been an outstanding short sale opportunity whenever it has reached 4.8:1 or higher. Historically, the ratio has always reversed and dropped back down to 3:1 or lower. Therefore, it is still a prime candidate for trading on the short side.

August Feeders July Corn ratio daily

August Feeders July Corn ratio daily

At the moment, the August feeder/July corn (x6) spread has recouped about half of the decline from the October high to the December lows. It would be nice to see the spread reach the Fibonacci .618 retracement of this range at -$1,557. At that level, the ratio would be awfully close to 6:1. A reversal off this level could present a lucrative reentry setup.

August Feeders July Corn (x6) spread daily

August Feeders July Corn (x6) spread daily

Conversely, a break below the similar March 25th reaction low at -$12,025 and the April 20th low at -$12,187.50 could indicate that the August feeder/July corn (x6) spread is rolling over again. Let’s watch this spread close and see what transpires.

Trade Strategy:

On the short April feeder/May corn (x6) spread entered at +$1,000 (premium feeders) on November 19th and the ‘add-on’ position entered at -$7,512.50 (premium corn) on December 9th, exit right here at -$4,050 or better. This will yield a profit of +$5,050 on the initial position and a loss of -$3,462.50 on the ‘add-on’ position for a net profit of +$1,587.50 on the trade (not including commissions).

Also, cancel the setup to add another on a close below the December low of -$20,550 (premium corn).

Cattle Crush Spread: Book The Profits

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 spread endured a wicked two-month decline from the contract high into the early April low. Since then, it has recovered about two-thirds of the decline and the cattle value has a premium for the first time since early March.

Aug-April-May 2015 Cattle Crush spread hourly

Aug-April-May 2015 Cattle Crush spread hourly

So here’s the dilemma: Next week is the Last Trading Day for the April feeder contract and it’s the First Notice Day for the May corn contract. We are looking out to the December-August-July 6:3:2 cattle crush spread, but it’s a few thousand dollars higher. Therefore, our opinion is that we should bag the profits here. We’ll get to the sidelines and then start monitoring the December-August-July 6:3:2 cattle crush spread for new setups.

Trade Strategy:

For the long August-April-May 6:3:2 cattle crush spread entered at -$10,860 (premium the sum of the feeders and corn) on October 27th and the ‘add-on’ position entered at -$350 (premium the sum of the feeders and corn) on February 23rd, exit right here at +$200 or better. This will yield a profit of +$11,060 on the initial position and a profit of +$550 on the ‘add-on’ position.

Also, cancel the setup to add another on a close above +$6k (premium live cattle).

Live Cattle/Lean Hog Spread: Entry Price Elected

Live Cattle/Lean Hog Spread

The IMC blog was working a hypothetical order to sell the December live cattle/lean hog spread on a bounce to 83.50 (premium cattle). This happened today. The 40,000 lb. December live cattle contract would have been sold short at approximately 151.05 and the 40,000 lb. December lean hog contract would have been purchased at approximately 67.55.

This initial exit plan is to bail out on a two-consecutive day close above 90.00 (premium cattle). The spread would have to make a sustained breakout to new contract highs to knock the position out.

December Live Cattle Lean Hog spread daily

December Live Cattle Lean Hog spread daily

The December live cattle/lean hog spread ended the day at 2.24:1. This is quite extreme. History indicates that the ratio should go back down to just half this level.

The spread is an even bigger outlier. Historically, the live cattle/lean hog spread has always gone back below 20.00 (premium cattle) after a big run. If this happens to the December spread it would knock off a whopping three-quarters of the current price premium. Therefore, aggressive spread traders should be watching for setups to add to short positions on the way down.

Cocoa/Sugar Spread: Roll To The July Contracts

Cocoa/Sugar Spread

The blog entered a hypothetical short position in the cocoa/sugar spread on October 3rd. We rolled from the March contracts to the May contracts back in February, so the spread is currently short from the equivalent of +$12,098 (premium cocoa).

Friday is the First Notice Day for the May cocoa contract. Although we have a couple more weeks for the sugar contract, let’s just keep things simple and roll both sides of the spread right now.

Keep in mind that the spread rallied above the +$15k level last autumn. This is at the top end of the range for the last three decades. Whenever this has happened in the past, the cocoa/sugar spread ultimately rolled over and went back down to ‘even money’.

Cocoa Sugar spread weekly

Cocoa Sugar spread weekly

Initially, it appeared that the decline off the September peak was the start of the bearish trend change. That’s why the blog went short. However, the February surge put the ball back in the bull’s court. If the July cocoa/sugar spread breaks out to new highs, the short position should be abandoned. That’s just prudent risk management. The strategy, however, remains intact: A new bearish trend change signal after a new contract high would justify getting back in on the short side.

Trade Strategy:

For tracking purposes, the blog will roll the May cocoa/sugar spread to the July cocoa/sugar spread at the market-on-close on Tuesday, April 14th. Cancel the ‘add-on’ order for the May spread. Risk the July spread to a two-consecutive day close above +$15k.

Feeder Cattle/Live Cattle Spread: Roll To The August Contracts

Feeders/Live Cattle Spread

On December 12th the blog entered a hypothetical short position in the April feeder/live cattle spread at approximately 59.70 (premium feeders). The initial exit criterion was a two-consecutive day close above 69.25.

Since we are dealing with two different contract sizes (50,000 lbs. of feeder cattle and 40,000 lbs. of live cattle), we are going to convert this spread to the difference between the contract values instead of the market prices. This will make it easier for us to track.

April Feeder Cattle Live Cattle spread daily

April Feeder Cattle Live Cattle spread daily

Hypothetically, we entered the April feeder cattle contract at a price of 221.10. This values the contract at $110,550. We also entered the April live cattle contract at a price of 161.40. This values the contract at $64,560. Therefore, the spread was initiated at $45,990 (premium feeders). Risking to a new high would mean a two-consecutive day close above $51,000.

Feeder Cattle Live Cattle ratio monthly

Feeder Cattle Live Cattle ratio monthly

When the spread was initiated, the ratio between the value of the feeder contract and the value of the live cattle contract was 1.71:1. Historically, the ratio is expensive whenever it reaches 1.6:1 or higher. In nearly half a century, there are less than a handful of times where the ratio reached 1.7:1 or higher (on a monthly closing basis). Therefore, we know that it is still at unsustainable levels. History shows that the ratio has always turned over and dropped back down to 1.3:1 or lower after an excursion to 1.6:1 or higher. Therefore, the probabilities are still quite favorable that more downside is coming.

August Feeder Cattle Live Cattle spread daily

August Feeder Cattle Live Cattle spread daily

Fortunately, the August feeder/live cattle spread is trading at a premium of a few thousand dollars over the April spread. Also, the current August ratio of 1.8:1 is higher than the contract high for the April ratio. This puts us in a favorable position for rollovers since it would put us in a short August spread at the equivalent of $50k or higher. Looking at the last forty years of history, we can see that anything above $15k used to be considered ‘pricey’ so the explosive move off the 2013 low to new record highs for several months in a row was one for the history books. If the reversion to the mean has really begun in the feeder/live cattle spread, there could be quite a lot of money to be made on the way down.

Trade Strategy:

For tracking purposes, the blog will roll the April feeder/live cattle spread to the August feeder/live cattle spread at the market-on-close on Tuesday, April 14th. Risk the August spread to a two-consecutive day close above +$56k.

Live Cattle/Lean Hog Spread: Updated Parameters For The Reentry Trade

Live Cattle/Lean Hog Spread

For the last couple of months, the IMC blog has been working a hypothetical order to initiate a short sale in the April live cattle/lean hog spread on a break below the December low of 73.65. April livestock contracts start going off the board this week, so this spread trade needs to be revised.

We now have our eye on the Christmas live cattle/lean hog spread. The summer spreads are trading at a steep discount to the April spread, but the December spread is priced nearly 14 cents ($5,600 on a single contract basis) above the summer spreads.

December Live Cattle Lean Hog spread daily

December Live Cattle Lean Hog spread daily

The December live cattle/lean hog spread peaked just below 84 cents (premium cattle) in October, December and January. It broke through this resistance barrier in March and peaked at a contract high of 89.625. Once the 84-cent resistance level was conquered, it turned into a floor of support.

Last week the December live cattle/lean hog spread made a two-day close back below 84 cents. This indicates that the breakout is over. Therefore, a short sale is warranted.

December Live Cattle Lean Hog ratio daily

December Live Cattle Lean Hog ratio daily

The ratio between the December live cattle and December hogs peaked at 2.45:1 on the first day of spring (March 20th). It has since dropped to 2.2:1. This is the biggest decline that the ratio has experienced in the last several months. It creates an overbalancing of price, which is indicative of a trend change.

Live Cattle Lean Hog ratio weekly

Live Cattle Lean Hog ratio weekly

Let’s get some perspective of what 2.2:1 means historically. In the last +40 years, the cattle/hog ratio has only been as high as 2:1 on five different occasions (including the current excursion). This is based on the weekly closing prices of the nearest-futures contract. The previous four occurrences were followed by declines to at least either side of 1:1. This took the ratio well below a more normal level of 1.4:1. In other words, it acted like a pendulum that swung from one extreme to the other. If that’s the case, it seems that the probabilities are favorable that the live cattle/lean hog spread is in for a multi-month or even a multi-year decline once the bull market finally ends.

Trade Reentry Strategy:

For tracking purposes, the blog will cancel the hypothetical trade to sell the April live cattle/lean hog spread. Place a new hypothetical order to sell one 40,000 lb. December live cattle contract and simultaneously buy one 40,000 lb. December lean hog contract if the spread rallies to 83.50 (premium cattle). Initially, the spread will be liquidated on a two-consecutive day close above 90.00.