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).   

 

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