Feeder Cattle/Corn Spread
Yesterday the September corn contract finished a two-consecutive day close above the declining 50-day Moving Average for the first time since late March. This triggered a high-probability bullish trend change signal. For the last two years, using a two-day close above/below the 50-day MA to signal a trend change has been highly accurate and also profitable for traders who used it for entry and exit signals. As a matter of fact, the bullish trend change signal in March was the only one that failed to produce a profit for traders using it as a reversal system. All of the other trend change signals experienced follow through for months afterward.
Today the corn market exploded to a two-month high and cleared a prior month’s high for the first time this year. This altered the bearish price structure on the monthly timeframe and confirms the trend change.
Furthermore, the October feeder cattle contract traded at ‘limit down’ today before bouncing just a bit at the end. It still closed below the rising 50-day Moving Average for the first time in over two months. It also cracked the uptrend line that was drawn across the February 25th contract low and the mid-April correction low.
The combined bearish signal in the feeders and bullish signal in corn caused the October-September feeder/corn (x6) spread to crash below the support level at the similar November top, the May top, and the June 8th pullback low and close below the rising 50-day Moving Average for the first time since the start of March. This triggered the hypothetical short sale signal for the blog.
The short position was entered by selling one 50,000 lb. October feeder cattle contract at 215.70 (contract value of $107,850) and buying six 5,000 bushel September corn contracts at $3.82 3/4 (a total contract value of $114,825). Therefore, the position is short from -$6,975 (premium the sum of the six corn contracts). The initial exit criteria will be to liquidate on a two-consecutive day close above -+$4,300 (premium feeders).
Although it is disappointing to see that the entry was triggered on a breakdown to a two-month low, the profit target still justifies it as a worthwhile trade. Historically, the feeder/corn (x6) spread has usually gone back down to -$60k or lower after rolling over from multi-year highs. That’s about $53,000 lower than today’s close. If ‘add-on’ setups occur along the way, this is the sort of trade that can make a trader’s year.