Live Cattle/Lean Hog Spread
On Monday the December live cattle/lean hog spread closed at a new contract high of 95.12. Three days later, it closed at 91.85. This 3.27-cent pullback off the highs is the largest pullback that has occurred since the mid-April correction low was established. It also triggered the blog’s entry criteria to get short on a pullback of three cents (3.00 points) or more (on a closing-basis) from the watermark high.
The IMC blog made a hypothetical trade by selling one 40,000 lb. December live cattle contract at approximately 152.47 and simultaneously buying one 40,000 lb. December lean hog contract at approximately 60.62. This opens a short spread position at 91.85. Initially, we will liquidate the spread on a two-consecutive day close above 95.62 (.50 points above the contract high).
If the December live cattle/lean hog spread closes at a price of 92.85 or less today it will post the first weekly loss in nine weeks and alter the bullish price structure. This would corroborate the current overbalancing of price on the daily timeframe. After that happens, we will be pulling for a two-day close below the rising 20-day Moving Average (currently around 89.95) for the first time since the first half of May and a close back below the March 23rd top at 89.62 (old price resistance, once it has been broken, becomes new price support). Once this occurs, the bearish trend reversal in the December live cattle/lean hog spread should be solidified.
The blog is still working a hypothetical ‘add-on’ 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 closes below 80.00 (premium cattle). Initially, risk the ‘add-on’ position to a two-day close above 85.00.
The price parameters for this ‘add-on’ trade could be changed if the price pattern between here and there lends itself to a better setup. We will certainly post an update if this turns out to be the case. It won’t be the only ‘add-on’ trade that we do, though. Since the 20-cent area is a historically normal level for the live cattle/lean hog spread to return to, we want to take full advantage of the bear market potential by actively looking for additional ‘add-on’ opportunities.