Copper/Gold Spread: Roll to 2017 Contracts

Mean Reversion Underway

Last spring we said that the plunge in the copper(x2)/gold spread was setting up for the buying opportunity of a lifetime.  We reiterated this statement again in the summer.

Looks like we were right.

The IMC blog bought a December copper(x2)/gold spread at -$23,100 (premium gold) on September 29th.  Here we are two months later and the spread is trading at a nearly seventeen-month high of +$15,740 (premium copper)!

Currently, the spread appears to be on track for a price resistance zone between the 2015 high of +$28,190 (premium copper) and the November 2014 high of +$34,380 (premium copper).  Based on history, a rally into this area after an inversion in the spread seems very likely.  On the surface, this seems like it might be a good price zone to consider bagging the profits.

december-copper-x2-gold-spread-daily-3-years

December Copper (x2) Gold spread daily (3 years)

The ratio between copper and gold, however, argues that the spread will greatly exceed the price zone between the 2015 and November 2014 highs.

History shows that prior events where two copper contracts traded at or below the value of one gold contract were followed by reversals to where the two copper contracts would reach a minimum premium of 66% or more over the value of one gold contract.

Just to hit the minimum ratio of 1.66:1 from here, the copper(x2)/gold spread would have to soar to +$53,475 if the current copper price remained the same.  And if the current gold price remained the same, the spread would have to reach -you better sit down for this one- a nosebleed level of +$78,540!

Split the difference and you’re looking at a projected target of +$66,000 for the ratio to reach 1.66:1.

Therefore, it makes sense to simple roll the December spread over right here ahead of the First Notice Day for the December contracts and stay on the ride.

Trade Strategy:

Sell the two December copper contracts and simultaneously buy two March copper contracts at the market-on-close on Monday, November 28th.  Also, buy back the one short December gold contract and simultaneously sell one February gold contract at the market-on-close on Monday, November 28th.  This will roll the position from the December spread to the March-February spread.

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Cocoa/Sugar Spread: Another Short Sale Setup

Riding the Bear

The IMC blog has been in a profitable trade in the cocoa/sugar (x2) spread for over a year now.  Based on adjustments for rollovers, we’re holding a short position in the March cocoa/sugar (x2) spread that was entered on September 30th at the equivalent of +$37.20 (premium cocoa), a second ‘add-on’ position that was entered on February 18th, at the equivalent of -$3,319 (premium sugar), and a third ‘add-on’ position that was entered on April 19th at the equivalent of -$6,528.40 (premium sugar).

march-cocoa-sugar-x2-spread-daily-75-day-ma

March Cocoa Sugar (x2) spread daily (75-day MA)

Over the last week and a half, the spread has bounced from trading near contract lows to closing just above resistance between the November 1st bounce high of -$21,195.60 and the declining 75-day Moving Average around -$21,336.20.  It’s do-or-die right here.

On the nearest-futures chart, the cocoa/sugar (x2) spread is sitting just below that same resistance level between the November 1st bounce high and the declining 75-day Moving Average.

cocoa-sugar-x2-spread-nearest-futures-daily-75-day-ma

Cocoa Sugar (x2) spread (nearest-futures) daily (75-day MA)

In addition, the nearest-futures spread has currently rallied as much as $4,158.80 from the recent low.  Since the bull market ended in September of 2015, the spread has made four other notable bounces of $5,076.40 off the January low, $5,679.20 off the March low, $4,041.60 off the July low, and $5,014 off the October low.  Based on this symmetry, the bounce could be close to completed.

Reading the Ratio

The ratio between the value of a 10-tonne cocoa contract and a 112,000 lb. sugar contract recently tagged 1:1 for the first time in over four years.  Prior bull markets that peaked at a ratio of 2.5:1 or higher were followed by multi-year bear markets that took the ratio below 0.8:1 each time.  Therefore, the current bounce could be nothing more than another bear market rally.  These are short sale opportunities and will remain so until the trend changes.

Due the decline in the ratio, the IMC blog will adapt by taking additional ‘add-on’ signals for a spread between one cocoa contract and one sugar contract.  This keeps it more dollar neutral.

march-cocoa-sugar-spread-daily-50-day-ma

March Cocoa Sugar spread daily (50-day MA)

Viewing the March cocoa/sugar spread, one can easily see that the downtrend remains fully intact and that bounces into the declining 50-day Moving Average have been selling opportunities.  Therefore, we have a green light to add to short positions right here.

Trade Strategy for ‘Add-On’ Position:

Work a hypothetical contingency order to sell one 10-ton March cocoa contract and simultaneously buy one 112,000 lb. March sugar contracts at +$1,550 (premium cocoa) or better.  Initially, this ‘add-on’ spread will be liquidated on a two-consecutive day close above +$3,000 (premium cocoa).   

 

Crude/Nat Gas Spread: Book the Rest of the Profits

End of the Road

The IMC blog entered a long position in the December crude oil/natural gas (x2) spread at -$20,000 (premium nat gas) on August 5th.  The December crude oil contract expires today, so we’re just going to book the profits, sit on the sidelines, and enjoy our Thanksgiving turkey.

december-crude-oil-natural-gas-x2-spread-daily

December Crude Oil Natural Gas (x2) spread daily

However, being on the sidelines does not mean that we are not monitoring the crude oil/natural gas (x2) spread.  We are now focusing our attention on the June 2017 contracts.  That spread is currently priced around -$10,650.  A return to the double bottom between the January and August lows of -$15,960 and -$15,820 would have us watching for a setup to get back in on the long side.  Until then, enjoy your Thanksgiving holiday!

Trade Strategy:

On the long December crude oil/natural gas (x2) spreads entered at -$20,000, take profits here at -$11,600 or better to liquidate the trade with a profit of +$8,400.

Minneapolis/KC Wheat Spread: Use the Ratio for Timing the Entry

Spring Forward

Just a week ago, it was time for us to ‘fall back’ here in the US.  And now we’re less than two weeks out from Thanksgiving!  This brings the Christmas delivery contracts right into view.

Since the futures markets are pricing in the future, we think it’s now time to move our recommendation for a December spread trade into the future as well.  Always good to stay a step ahead of the crowd.

The blog is currently working an order to short the December Minneapolis/Kansas City wheat spread.  We are simply going to move the recommendation over to the March 2017 spread now.

march-minneapolis-kansas-city-wheat-ratio-daily

March Minneapolis Kansas City Wheat ratio daily

The entry parameters for this trade are going to be tweaked slightly.  Initially, we were going to short the December spread once it cracked support at the rising 75-day Moving Average.  The December spread has not done this yet, but the March spread already did this and recovered.  So that’s a failure.

However, the March Minneapolis/Kansas City wheat ratio has held above the 75-day MA this entire time.  It’s been eight months since the ratio last closed below the 75-day MA.  Therefore, we are going to wait for the ratio to break support before initiating a short position in the March Minneapolis/Kansas City wheat spread.

Trade Strategy:

Cancel the hypothetical order to short the December Minneapolis/Kansas City wheat spread.  Place a new order sell one March Minneapolis wheat contract and simultaneously buy one March Kansas City wheat contract if the ratio between the two contracts closes below the rising 75-day MA (currently near 1.19:1).  If filled, risk a two-day close of three cents above the spread contract high that precedes the entry (currently at +$1.07 1/4 cents). 

Crude/Nat Gas Spread: Take Some Money Off the Table

Best of Both Worlds

The IMC blog entered a long position in the December crude oil/natural gas (x2) spread at -$20,000 (premium nat gas) on August 5th, purchased a second spread at -$15,310 on August 11th, and purchased a third position was entered at -$13,690 on August 15th.

The spread recently soared to the highest level since May, but it is now turning over.  Is this just a temporary pullback after the explosive rally?  Or is it over?

december-crude-oil-natural-gas-x2-spread-daily

December Crude Oil Natural Gas (x2) spread daily

The more important question is do we cash out or hang on?!

The nice thing about having multiple positions is that we can take partial profits.  It’s not a binary “in-or-out” decision.  It really is the best of both worlds.  So that’s what we’re gonna do here.

Trade Strategy:

On the long December crude oil/natural gas (x2) spreads entered at -$15,310 and -$13,690, take profits at -$12,000 or better.

 

December 2017 Copper/Gold Scale: Over $70k In Profits!

Planning the Work

On July 20th the blog implemented a scale trade strategy with the December 2017 copper(x2)/gold spread.  The scale ran on $5k intervals where a spread would be purchased every $5k down and then liquidated every $5k higher.

Keep in mind that the price intervals for the scale were based on closing prices.  This led to several better-than-expected purchase and liquidation prices since the closing price would often overshoot the exact $5k interval.

Furthermore, we launched the scale with several ‘bonus fills’ as the spread was well below our theoretical start level of -$5k where the value of the sum of two 25,000 lb. copper contracts is worth $5,000 less than the value of one 100 oz. gold contract.  We initially bought four December 2017 copper(x2)/gold spreads at -$21,135, yet we set the liquidations targets at -$15k, -$10k, -$5k, and even money.

Working the Plan

As the spread continued to drop, we picked up a couple more positions.  They were purchased at -$25,725 on August 1st and -$30,915 on September 6th.

The spread has been in a downtrend since the spring of 2015, so the drop to new record lows certainly was a test of a scale traders mettle (metal?) and conviction!

Finally, a bounce came.

The spread that was purchased on September 6th was sold on September 15th for a profit of +$6,800.

The spread that was purchased on August 1st was sold on October 4th for a profit of +$7,030.

Then we experienced nothing but radio silence for the next month.  The spread was bound in a tight range as it refused to drop low enough to trigger a repurchase or rally high enough to trip the wire on another exit.

Ringing the Cash Register

The silence was finally broken one week ago and the move has been explosive!  On November 7th the December 2017 copper(x2)/gold spread closed at -$13,090 and triggered a liquidation order.  This resulted in a profit of +$8,045.

On November 8th the December 2017 copper(x2)/gold spread closed at -$8,970 and triggered another liquidation order.  This resulted in a profit of +$12,165.

december-2017-copper-x2-gold-spread-daily

December 2017 Copper (x2) Gold spread daily

A third liquidation order for the week was triggered on November 9th the December 2017 copper(x2)/gold spread closed at -$4,985.  This resulted in a profit of +$16,150.

Finally, the last remaining position in our scale was liquidated on November 10th when the spread closed at +$375 and gave us a nice profit of +$21,510.

The total profit on this scale was +$71,700.

In just under four months.

Not too shabby!

What Next?

All positions in the scale have been liquidated.  So what now?  Simple: Leave the plan in place!  The blog will buy a December 2017 copper(x2)/gold spread on a close at -$5k or less, buy another one on a close at -$10k or less, buy another one on a close at -$15k or less, etc.  The purchase intervals are set every $5k lower.

On the other side of the coin, any purchased positions will be liquidated on a close that is $5k or better than the interval purchase level.  Note that the liquidation targets are based on the scale intervals, not the actual purchase price.  This means that any better-than-expected purchase prices will result in even bigger profits when it is finally liquidated.

If the copper(x2)/gold spread just goes to the moon from here and never dips back down into the scale trade zone, we will simply look elsewhere for other scale trading opportunities.  The strategy is applicable to most traditional commodities.  Therefore, we don’t have to be dependent on the metals or any one commodities sector.

Feeder/Corn Spread: Roll to 2017 Contracts

Time to Switch

The IMC blog entered a short position in the Nov-Dec feeder/corn (x4) spread at -$2,662.50 (premium corn) on September 6th.  The November feeder contract is about to expire and the First Notice Day for the December corn contract is just a couple of weeks out, so we’re going to roll to the March 2017 contracts right now.

The March feeder/corn (x4) spread made a double top formation back in August and fell to a four-month low by mid-October.  The current three-week rally has now brought it into a technical resistance area at the Fibonacci .382 retracement of the entire decline and the declining 50-day Moving Average.  If you aren’t already short or you’re looking to add to the position, this would be a good place to do it!

march-feeder-corn-x4-spread-daily

March Feeder Corn (x4) spread daily

Don’t forget that we’re looking for the spread to ultimately descend to the -$40k area at a minimum.  This is not a guarantee, of course, but it’s based on decades of price history.  This gives us favorable probabilities.  Therefore, we will be watching closely to see if a low-risk setup materializes to allow us to pyramid the position.

Trade Strategy:

Buy back the short 50,000 lb. November feeder cattle contract and simultaneously sell short a March feeder cattle contract.  Also, sell the four 5,000 bushel December corn contracts and simultaneously buy four 5,000 bushel March corn contracts.  Risk the March feeder/corn (x4) spread to a two-day close above even money.