Bean Oil/Corn Spread: Take the Money

Bookin’ Some Profits

The IMC blog entered a hypothetical long position in the July 2016 bean oil/corn spread at -$2,760.50 (premium corn) on October 9th.  The position was liquidated at +$1,212.50 (premium bean oil) on April 21st.  The trade resulted in a profit of +$3,973 per spread.

July Bean Oil Corn spread daily

July Bean Oil Corn spread daily

The first two-day close below the rising 50-day Moving Average since October prompted the exit.  Given the fact that the spread had poked its head above the +$3k mark at the start of the month, it’s not all that surprising to finally see a pullback and perhaps even a trend change.

At current levels, the spread is not historically mispriced.  So we’ll put this one on the back burner for now.  A rally to +$6k (premium bean oil) or a plunge to -$4k (premium corn) would bump the bean oil/corn spread back toward the top of the watch list.

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Feeder/Corn Spread: It’s Rollover Time!

Time to Roll

The IMC blog entered a short position in the April-May feeder/corn (x5) spread at -$11,462.50 (premium the sum of the five corn contracts) on January 8th.  Since the First Notice Day for both of these markets hits next week, it’s time to roll over.

At yesterday’s new contract low of nearly -$24k, it would appear that the April-May feeder/corn (x5) spread has already declined enough.  However, history indicates that the spread could still have significant downside ahead.

First of all, the spreads prior excursions to ‘even money’ or better (where one feeder contract was worth at least the same value as the sum of five corn contracts) were followed by multi-month/multi-year declines to -$50k, -$38k, and -$133k (!).

Feeder Corn (x5) spread (nearest-futures) weekly

Feeder Corn (x5) spread (nearest-futures) weekly

In addition, the ratio between a 50,000 lb. feeder cattle contract and a 5,000 bushel corn contract is a little under 4:1 today.  The normal level for the ratio is somewhere around 3:1.

The ratio peaked at an eye-popping record high of nearly 7.5:1 about a year and a half ago.  It has been working its way lower since.  Prior peaks near 5:1 or higher were followed by declines that put the ratio below 3:1.  The 1987 peak of 4.98:1 was followed by a decline to nearly 2:1 the following year and the 2005 peak of 6.15:1 was followed by a decline to 1.5:1 over the next two and a half years.

To reach a ratio of 3:1, the feeder/corn (x5) spread would have to decline to somewhere between -$39k and -$50k.  That’s another $18,000 to $28,000 from where the spread sits today.  And if the ratio is heading to 2:1 or lower…well, I’ll let you do the math on that.  It’s certainly worth your while to be short.

We are going to roll the position to the August-September spread.  We will also monitor the spread vigilantly for setups to add to the position.

Trade Strategy:

Buy the one 50,000 lb. April feeder cattle contract and simultaneously sell one 50,000 lb. August feeder cattle contract at the market-on-close on Friday, April 22nd.  Also, sell the five 5,000 bushel May corn contracts and simultaneously buy five 5,000 bushel September corn contracts at the market-on-close on Friday, April 22nd.  This will roll the short April-May feeder/corn (x5) spread position into an August-September feeder/corn (x5) spread position.  Risk the August-September spread to a two-day close above -$9,000 (premium the sum of the five corn contracts).

Kansas City/Chicago Wheat Spread: Roll to July

Thinking of Summer

Well, boys and girls, next week is the First Notice Day for the May grain contracts.  Unless you actually want to take delivery of this stuff, it’s time to roll out to the summer contracts.

The blog is holding a hypothetical long position in the May KC/Chicago wheat spread that was entered at the equivalent of at -3/4 cents (premium CBOT wheat) on November 30th.

Several months into this trade, the Kansas City wheat is still priced at a discount to the Chicago wheat.  This is unusual because the KC wheat is a better grade than the CBOT wheat.  Therefore, we will side with history and continue to favor a return to the KC wheat having the premium.

May Kansas City Chicago Wheat spread daily

May Kansas City/Chicago Wheat spread daily

In the past, inversions in the KC/Chicago wheat spread have been followed by the KC wheat reaching a 35-40 cent premium over CBOT wheat.  So if the July KC/Chicago wheat clears the March high we may look to increase the size of the long position.

Conversely, the July spread just fractionally broke the similar lows from November and February.  If the July spread continues to edge lower, it could have a clean shot at a return to the nearest-futures November low of -40 1/4 cents (premium CBOT wheat).  In light of this, we’re going to use a short leash on the July spread.  If we get knocked out, we can simply watch for a setup to reenter.

Trade Strategy:

On the long May KC/Chicago wheat spread that was entered at the equivalent of at -3/4 cents (premium CBOT wheat), roll to the July contracts at the market-on-close on Friday, April 22nd.  Risk the July spread to a two-day close below -13 cents (premium CBOT wheat).

Cocoa/Sugar Spread: Rollin’ Out

Buying Time

Currently, we are holding a short position in the May cocoa/sugar (x2) spread that was entered on September 30th from the equivalent of +$2,856 (premium cocoa) and a second ‘add-on’ position in the May cocoa/sugar (x2) spread that was entered at -$500 (premium sugar) on February 18th.

A third spread -which was another ‘add-on’ position – was entered in the July spread at -$4,000 (premium sugar) on April 19th.

We just passed the First Notice Day for May cocoa and the First Notice Day for May sugar is quickly approaching.  Therefore, we are going to roll the May spreads over to the July contracts.

Cocoa Sugar (x2) spread (nearest-futures) monthly

Cocoa Sugar (x2) spread (nearest-futures) monthly

Remember that previous rallies to +$4,500 (premium cocoa) or higher on the nearest-futures monthly chart were ultimately followed by major bear markets.  Each one crushed the cocoa/sugar (x2) spread down to -$20,000 (premium sugar) or lower.  Therefore, the spread still has a long, long way to go before we expect a bear market finale.  We’ll continue to add to the short position when the right setups materialize.

Trade Strategy:

On the hypothetical short May cocoa/sugar (x2) spread entered at the equivalent of +$2,856 (premium cocoa) and the ‘add-on’ position entered at -$500 (premium sugar), roll to the July contracts at the market-on-close on Friday, April 22nd. 

Cocoa/Sugar Spread: Adding More

Satisfying Our Sweet Tooth

This morning the IMC blog added a third short position in the July cocoa/sugar (x2) spread when it rallied to -$4,000 (premium sugar).  Initially, this ‘add-on’ spread will be liquidated on a two-consecutive day close above -$2,000 (premium sugar).

July Cocoa Sugar (x2) spread daily

July Cocoa Sugar (x2) spread daily

Over the last several months, the blog has increased the short position in the cocoa/sugar (x2) spread by three-fold.  With a minimum downside target of -$20,000, we hope to continue adding.  We’ll let you know if we see another setup.

Cocoa/Sugar Spread: Another Short Sale Setup

Riding the Bear

The IMC blog is holding a hypothetical short position in the May cocoa/sugar (x2) spread that was entered on September 30th from the equivalent of +$2,856 (premium cocoa).  A second ‘add-on’ position was then entered at -$500 (premium sugar) on February 18th.

The recent price action has provided a setup to sell another cocoa/sugar (x2) spread.  This time, we are going to focus on the July spread since the May spreads will be rolled over in the next week or so.

Last September the cocoa/sugar (x2) spread was trading at a multi-year high.  It then gave up the ghost and triggered a short sale signal.  By all appearances, this was the start of a bear market.

July Cocoa Sugar (x2) spread daily

July Cocoa Sugar (x2) spread daily

The fourth quarter started with a break below the rising 100-day Moving Average for the first time in several months.  Once this technical support level was breached, it turned into a resistance level.

The 100-day MA has proven its worth so far.  After bottoming in early October, the July cocoa/sugar (x2) spread rallied for over two months.  It peaked after tagging the 100-day MA.

The spread once again posted a short-term bottom in mid-January.  A one-month rally followed and the spread once again crested after tagging the 100-day MA and backing down.

Another Short Sale Opportunity

The July cocoa/sugar (x2) spread reached a sixteen-month low in late March.  It then snapped back into mid-April.  At last week’s high, the spread was just $650 away from the 100-day MA.  Boy, this could have been a perfect setup: Get a test of the 100-day MA and then sell another spread if it backs off within a day or two.

Alas, Willy Wonka did not grant our wish!  The July cocoa/sugar (x2) spread fell nearly $1,900 on Friday as the sugar market exploded higher.

Be that as it may, this may still be a good time to sell short.  The recent break off the mid-April high does have some similarities to the nearly $2,400 four-day drop that occurred right after the mid-December high and the $2,100 one-day drop that occurred right after the mid-February high.  Therefore, the blog is willing to increase the short position right here and risk above last week’s high.  In just a couple of weeks, the 100-day MA should be near or even below the April 14th high.  This will serve as a technical reinforcement level.

Cocoa Sugar (x2) spread (nearest-futures) weekly

Cocoa Sugar (x2) spread (nearest-futures) weekly

From a reward-to-risk perspective, a short sale right here looks pretty lucrative as well.  If we short it at -$4k and risk to -$2k, the risk would be approximately $2,000.  Keep in mind that our minimum downside target for the cocoa/sugar (x2) spread is -$20,000 (premium sugar).  Therefore, we’d stand to make $16,000 on a short sale from here if the minimum target is reached.  Risking $2k to make $16k is a reward-to-risk ratio of 8:1.  Can’t beat that with a stick…or a chocolate bar.

Trade Strategy for ‘Add-On’ Position:

Work a hypothetical contingency order to sell one 10-ton July cocoa contract and simultaneously buy two 112,000 lb. July sugar contracts on a rally to -$4,000 (premium sugar).  Initially, this ‘add-on’ spread will be liquidated on a two-consecutive day close above -$2,000 (premium sugar).   

Platinum/Gold Spread: Bullish Trend Change…Finally?!

Trend Reversal Signal

For the first time since the summer of 2014, the platinum/gold spread made a two-day close above the declining 100-day Moving Average.  This triggered another potentially bullish trend change.

On April 14th, the blog hypothetically bought a pair of 50/oz. July platinum futures contracts at $992.90 and simultaneously sold one 100 oz. August gold contract at $1,228.10 for a speculative long position and as an ‘add-on’ to the long investment position.  This put the spread entry price -$235.20 (premium gold).

Platinum Gold spread (nearest-futures) daily

Platinum Gold spread (nearest-futures) daily

The speculative long position will initially be liquidated on a two-day close below -$321.50 (premium gold), which is $5/oz. below the current contract low.

The ‘add-on’ investment position will initially be liquidated on a two-day close below -$284.20 (premium gold), which is the current low of the month.  Initially, we were going to give it a shorter leash of a two-day close back under the 100-day MA, but we’ve decided to give it a little more breathing room.  This is partly because the platinum/gold ratio is holding above the 100-day MA even better than the spread is.  (A hat tip to Alex for pointing that out).  However, we may tighten the exit criteria if the spread fails to gain more ground by the end of the month.

One for the Record Books

We keep pounding the table about the fact that the platinum/gold spread is overdone in terms of both price and time.  We believe that, based on history, this spread will pay handsome dividends on the long side for those who have the bankroll and the patience to pursue the long side.  But so far, this belief has been based on faith and not evidence.

Still

The January 20th multi-decade low of 0.74:1 put the platinum/gold ratio right on the doorstep of the October 1982 record low of 0.69:1…

While the new record low of -$315.50 (premium gold) that occurred in the spread on March 3rd was not confirmed by a new low in the ratio…

And the current inversion has now been stretched to duration of one year and three months, making it the second-longest inversion in history.  The only inversion that lasted longer was the one year and seven-month run between September 1981 and April 1983.

Platinum Gold ratio (nearest-futures) daily

Platinum Gold ratio (nearest-futures) daily

Given the record extremes of this bear market, we expect that the pendulum will inevitably swing into a substantial bull market.  Therefore, we will be watching for setups to add to both the speculative and investment positions once the bull market finally materializes.

Soy Meal/Bean Oil Spread: Out With Profits

Booked Profits

The recent pop in the soy complex caused the July soy meal/bean oil spread to make a two-day close above the 50-day Moving Average for the first time in nearly seven months.  This signaled a bullish trend change and triggered an exit signal on the blog’s short position.

July Soy Meal Bean Oil spread daily

July Soy Meal Bean Oil spread daily

The IMC blog was hypothetically short the July soy meal/bean oil spread from the equivalent of +$13,498 (the trade was initiated on October 2nd and has been rolled over).  The position was liquidated at +$8,384 on April 12th, resulting in a profit of +$5,114 per spread.

What Now?

The rebound in the July soy meal/bean oil spread has pushed it up near the Fibonacci .382 retracement of the entire decline from last summer’s top.  If the rally continues it could return to the current high of the year.  This would put it near the midpoint of the decline.

After reaching such lofty heights over the last couple of years, it made sense that we could expect a bear market decline into the even money area where the value of a soy meal contract and a bean oil contract are the same.  After all, this is how it usually played out in the past.

Soy Meal Bean Oil spread monthly

Soy Meal Bean Oil spread monthly

The four-year low that was tagged at the start of this month merely put the spread and the ratio near the midpoint of the price range of the last three decades.  Since it hasn’t reached the even money target yet, this still leaves the soy meal/bean oil spread on the table as a potential short sale candidate.  Therefore, we’ll watch how the current rally plays out and see if there’s a new setup to get short again when it rolls over.