Sugar/Corn Spread: Roll and Add More

Bears Firmly In Control

The IMC blog entered a short position in the May sugar/corn spread on February 13th when the value of one sugar contract closed at a premium of +$3,251.30 over the value of one corn contract.

Early this month, the corn contract finally closed with the premium value.  That hasn’t happened since last June.  We are taking this as confirmation that the expected bear market is firmly intact.  Based on history, we expect to see this spread decline several thousand more dollars before it’s all said and done.

July Sugar Corn spread daily

July Sugar Corn spread daily

Today, we are going to do two things.  First, roll the May contracts to the July contracts.  First Notice Day is just a few days off.

Secondly, we are going to add to the short position.  The spread has been consolidating in a tight range for the last three weeks.  This pattern gives us a low-risk setup to get short on a breakout of the range and risk to the other side of the range.

Trade Strategy:

Buy back the short May sugar contract, sell one July sugar contract short, sell the May corn contract, and simultaneously buy one July corn contract at the market-on-close on Tuesday, April 25th.  Risk the July spread to a two-consecutive day close above +$4,000 (premium sugar). 

 “Add-On” Trade Strategy:

Place a hypothetical contingency order to sell one 112,000 lb. July sugar contract and simultaneously buy one 5,000 bushel July corn contract if the spread closes below the April 5th low of -$436.20 (premium corn).  If filled, liquidate the position on a three-consecutive day close above the April high (currently at +$437.10). 

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Grain Basket: Roll to the Summer Spreads

Stay Short

The IMC blog entered a short position in the May Grain Basket spread (the difference between the price of one May soybean contract and the sum of one May wheat contract and one May corn contract) at +$2.16 (premium beans) on February 13th.

With the upcoming First Notice Day for the May grain contracts, we are going to roll to the July contracts.

July Grain Basket spread daily

July Grain Basket spread daily

After cracking support at the rising 100-day Moving Average in February, the Grain Basket slumped to multi-month lows.  It has rebounded over the last couple of weeks, but the now declining 100-day MA should provide technical resistance and cap the rally.

The April 11th multi-month low of $1.29 1/2 sets near-term price support.  A break below this price should clear the way for a collision with the psychological one dollar mark.  If the July Grain Basket does hit a new low for 2017 the blog will be watching closely to see if a setup materializes that would allow for an additional ‘add-on’ short sale to take advantage of the continued descent.

Trade Strategy:

Exit the short May soybean contract, long May wheat contract, and long May corn contract and simultaneously sell  short a short July soybean contract, buy a July wheat contract, and buy a July corn contract at the market-on-close on Tuesday, April 25th.  Risk the July grain basket spread to a two-day close above +$2.80. 

 

Minneapolis/Kansas City Wheat Spread: Reset For the July Spread

Waiting for a Reversal

The IMC blog is holding a short position in the May Minneapolis/Kansas City wheat spread that was entered at +97 cents on February 10th.

The spread has rebounded sharply over the last two weeks and is testing the contract highs.  Therefore, we are going to liquidate the May spread and set parameters to short the July spread if it backs off.

July Minneapolis Kansas City Wheat spread daily

July Minneapolis Kansas City Wheat spread daily

We’ve established before that the Minneapolis hard red spring wheat is currently too pricey in comparison to the Kansas City hard red winter wheat.  It’s been this way for months, though.  While we still intend to be short, a breakout to new contract highs could keep it running indefinitely.  Hence, the strategy of waiting for the July spread to start back down before getting short again.

Trade Strategy:

Exit the hypothetical short position in the May Minneapolis/Kansas City wheat spread at the market-on-close on Tuesday, April 25th. 

Place a new order sell one July Minneapolis wheat contract and simultaneously buy one July Kansas City wheat contract if the spread closes below +$1.10.  If filled, risk a two-day close of three cents above the spread contract high that precedes the entry (currently at +$1.20 cents). 

Feeder/Corn Spread: Roll To Aug and Sep Contracts

Near-Term Price “Cattle-yst” At Hand?!

The IMC blog has been holding a short position in the feeder/corn (x4) spread since September 6th.  Due to rollovers, the blog is currently short the April-May spread from the equivalent of -$9,912.50 (premium corn).

April-May Feeders Corn (x4) spread daily

April-May Feeders Corn (x4) spread daily

The spread is currently a stone’s throw from the contract high.  We’re hoping for a double top.  If it blasts thru to new contract highs, however, it would be prudent to take our lumps and get out.

Today we are going to roll out to the August-September spread.  Neither the April-May spread nor the Aug-Sep spread has ever closed with the value of the feeder contract at a premium over corn.  If that happens, it will be our signal to exit stage right.

Feeders Corn (x4) spread weekly

Feeders Corn (x4) spread weekly

A breakout above the even money level could allow this spread to race toward last summer’s high of +$10,087.50 (premium feeders).  If the run doesn’t stop there, who’s to say it can’t double the premium and reach +$20k?!

Also, the feeder/corn ratio is currently sitting just below 4:1.  A breakout above even money for the spread would mean that the feeder/corn ratio has exceeded 4:1.  If that occurs, the odds increase that the ratio will head for the next handle at 5:1.

Feeders Corn ratio weekly

Feeders Corn ratio weekly

Heck, it could even go higher than that.  If that happens, we will adjust the ratio of the spread to get closer to dollar neutral and look for a setup to get short on a reversal.  As you can see on the forty-year weekly chart, a ratio of 5:1 or higher does not come around very often.

Trade Strategy:

Buy back the short 50,000 lb. April feeder cattle contract and simultaneously sell short an August feeder cattle contract at the market-on-close on Tuesday, April 25th.  Also, sell the four 5,000 bushel May corn contracts and simultaneously buy four 5,000 bushel September corn contracts at the market-on-close on Tuesday, April 25th.  Risk the Aug-Sep feeder/corn (x4) spread to a two-day close above even money.

 

Copper/Crude Oil Spread: Watching For a Reversal

Looking to Reenter

Back on December 1st, the IMC blog entered a short position in the copper/crude oil spread at the equivalent of +$12,870 (premium copper), due to rollovers.

September Copper Crude Oil spread daily

September Copper Crude Oil spread daily

The blog was last holding a May spread.  It was liquidated at the market-on-close on April 20th at +$13,280 (premium copper) because the crude contract was expiring.

We are now stalking the September copper/crude oil spread for a short sale.  The blog did not roll into the September contracts automatically because the spread tested support at the early February low last week and bounced.  The plan is to get into the spread only if it breaks the similar lows from early February and last week.

Copper Crude Oil spread monthly

Copper Crude Oil spread monthly

Currently, it appears that the spread is headed for a test of the contract high that was posted just last month at +$17,882.50.  A breakout to new highs could push it right over the +$20k mark in a heartbeat.  If so, we will revise our short sale criteria.  History shows that this spread has been a good short sale after surpassing the +$20k level.

Trade Strategy:

Place a hypothetical contingency order to sell one September copper contract and simultaneously buy one September crude oil contract if the spread closes below +$10,000 (premium copper).  If filled, liquidate the position on a two-consecutive day close above the contract high that precedes the entry (currently at $17,882.50). 

If the spread closes above +$20,000, change the parameters to enter a short position if the spread closes below +$17,000.  If filled, liquidate the position on a two-consecutive day close above the contract high that precedes the entry. 

 

Live Cattle/Lean Hog Spread: Liquidate April and Monitor December

Exit Stage Right

The IMC blog is holding a short position in the April live cattle/lean hog (x2) spread entered at the equivalent of -3.10 (premium hogs).  The trade was initiated on October 12th and rolled several times.

The April spread is trading around -1.50 (premium hogs) this morning and it needs to be liquidated as the contracts are about to expire.  Unfortunately, the June spread is trading around -32.00 and the August spread is trading around -38.00.  Due to the significant price discount of the summer spreads, it does not appear to be a lucrative trade.

December Live Cattle Lean Hog (x2) spread daily

December Live Cattle Lean Hog (x2) spread daily

The December live cattle/lean hog (x2) spread is trading at a more reasonable price of -11.50 (premium hogs), but it recently broke out to multi-month highs.  Therefore, our plan is to liquidate the April spread and wait patiently to see if a short sale setup might materialize in the December spread.

Trade Strategy:

On the hypothetical short April live cattle/lean hog (x2) spread entered at -3.10 (premium hogs), exit at the market-on-close on Wednesday, April 12th.