Meal/Bean Spread: Build the Pyramid

Full Court Press

On June 23rd the IMC blog initiated a short position in the Dec-Nov soy meal (x2)/soybean spread at +$21,125 (premium meal).  The spread touched a two-month low this morning, so the trade is making some headway.

Prior tops at +$20k or higher (premium meal) were followed by drops back under +$9k (premium meal).  Therefore, we fully expect the Dec-Nov soy meal (x2)/soybean spread to return to the April 4th contract low of +$8,975.

December Soy Meal Soybean (x2) spread dailyFurthermore, prior to the 2012 drought, tops established north of +$20k were followed by bear market declines to ‘even money’ or lower.  So a break of the April low could indicate that the Dec-Nov soy meal (x2)/soybean spread has further downside potential of several thousand more dollars.

Given the fact that the spread seems to be in a fast decline and our minimum downside price expectation is several thousands of dollars away, it makes sense to pyramid this position to take full advantage of the decline.

Setting the Intervals

We’re going to add more short positions as the spread declines.  The ‘add-on’ positions will be entered in intervals as the down trend continues.  The trick, of course, is to know where to set those ‘add-on’ intervals.

One method I like to use is to measure the countertrend moves of the prevailing trend to get a sense of how much room we need to give the spread.  Then set the intervals at a size that is wider than the countertrend moves.  That way, we are allowing the market to have the breathing room that it has already demonstrated that it needs.

Since peaking on June 10th, the largest countertrend bounce in the Dec-Nov soy meal (x2)/soybean spread was the $1,970 rally off the June 24th low.  Therefore, the blog will use intervals of $3,000 to add to the position.  This is more than 50% bigger than the largest countertrend bounce to date, so the spread should have plenty of elbow room.

‘Add-On’ Trade Strategy:

The blog will sell another Dec-Nov soy meal (x2)/soybean spread on a close below +$18,125 (premium meal).  If filled, exit on a two-day close of $3,000 or more above the entry price.

If the ‘add-on’ order is filled, sell a third Dec-Nov soy meal (x2)/soybean spread on a close $3,000 below the entry price of the prior ‘add-on’ position.  If filled, exit on a two-day close of $3,000 or more above the entry price.

If the second ‘add-on’ order is filled, sell a fourth Dec-Nov soy meal (x2)/soybean spread on a close $3,000 below the entry price of the most recent ‘add-on’ position.  If filled, exit on a two-day close of $3,000 or more above the entry price.

To enter a short position in this spread, sell two 100-ton December soy meal contracts and simultaneously buy one 5,000 bushel November soybean contract.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s