Rollovers, Changes, and Other Housekeeping

The ‘To Do’ List

As we are about to close out the month and the first half of 2017, the IMC blog has a few spread positions that need to be rolled out to the more distant month contracts.  Also, there are current outstanding parameters for new trade positions that need to be adjusted and/or changed to longer-dated contracts.  For brevity’s sake, we’re gonna take care of all of this housekeeping in one single post instead of issuing multiple posts.


The blog entered a short position in the July Grain Basket spread (short one July soybean contract, long one July wheat contract, and long one July corn contract) at the equivalent of +$2.01 1/2 (premium beans) on February 13th.  Exit this spread and simultaneously enter a short position in the September Grain Basket spread (short one September soybean contract, long one September wheat contract, and long one September corn contract) at the market-on-close on Wednesday, June 28th.

The blog entered a short position in the July sugar/corn spread (short one July sugar contract and long one July corn contract) at the equivalent of +$3,025.80 (premium sugar) on February 13th and short an ‘add-on’ July sugar/corn spread at -$899.10 (premium corn) on April 26th.  Exit these spreads and simultaneously enter short positions in the Oct-Sep sugar/corn spread (short one October sugar contract and long one September corn contract) at the market-on-close on Wednesday, June 28th.

Parameter Changes

Last year, the IMC blog experimented with a value investing strategy known as scale trading.  We applied this strategy to the copper(x2)/gold spread in the second half of the year.  The trade campaign payed off as it netted a profit of nearly $72,000 in just under four months.  Therefore, we left standing orders in place to reenter if the spread returned to the qualifying price levels.

Currently, the blog is working orders to scale trade the December 2017 copper(x2)/gold spread.  We are going to change this to the July-June 2018 contracts in order to give ourselves lots and lots of time.  Therefore, the blog will cancel the current orders in the December 2017 spread and replace it with new orders to buy the July-June 2018 copper(x2)/gold spread (long two July copper contracts and short one June gold contract) 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.  Every position is to be liquidated on a close that is $5k or higher 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.

Also, the blog has been working a hypothetical order to short the September copper/crude oil spread.  Cancel the parameters for the September contracts and replace it with new orders to short a December copper/crude oil spread (short December copper and long December crude oil) on a close below +$18k (premium copper).  If filled, liquidate the position on a two-consecutive day close above the contract high that precedes the entry (currently at $22,265).

Platinum/Gold Spread: Setup To Go Long

Record Extremes

The blog has been sitting with an unleveraged platinum/gold spread since September of 2015.  We’re running this position as an “investment”, ergo, the lack of leverage.

The reason for the investment is because the platinum/gold spread hit a record low, the platinum/gold ratio hit a thirty-three year low, and the time that platinum has been priced below gold is at a record duration.  Our thought is that this is like a stretched rubber band that’s due to snap back violently.

However, rubber bands will sometimes break.  That’s another reason we’re doing this experiment without any leverage!

Trader’s View

Investment experiment aside, the platinum/gold spread looks like it could be good for a speculative trade.

First of all, the spread recently tested last year’s record low and stated to recover.  The bounce faded off at the end of May, but a recovery above the May high could put it on an upward trajectory.

Also, the last two times the spread dropped this low (June 2016 and October 2016) it was soon followed by rallies of $182/oz. and $135/oz.

Now, the spread initially bounced off the early May multi-month low and then fizzled out just a couple of weeks later.  Last week it even closed just a mere five dollars away from the May 4th low.  That’s not how it played out the last two times, so it’s a little suspect.

But that brings me to my next observation…

Over the last year or so, the 50-day Moving Average has done a good job of defining the trend in the platinum/gold spread.  The bounce into mid-May stalled out once the spread encountered the declining 50-day MA and failed to clear it.

Platinum Gold spread (nearest-futures) daily

Platinum Gold spread (nearest-futures) daily

A two-day close above the 50-day Moving Average for the first time since February would turn the trend bullish again.  Having that happen right after a test of the prior lows that launched the last two sizable rallies could stack the deck even further in the buyer’s favor.

As a trader- not an investor, mind you- it seems that going long in the platinum/gold spread on a close above the 50-day MA and liquidating on a close below it would not be a half-bad strategy.

Trade Strategy:

Place a hypothetical contingency order to buy two 50 oz. October platinum futures contracts and simultaneously sell one 100 oz. October gold futures contracts if the nearest-futures spread makes a two-day close above the 50-day Moving Average.  If filled, exit the position on a two-day close below the 50-day Moving Average.

Copper/Gold Spread: There May Be More Downside Ahead

Bag the Profits

IMC blog entered a long position in the July-June copper(x2)/gold spread from the equivalent of -$21,885 (premium gold) on September 29th.

The spread exploded higher at the end of last year.  A double top was established at similar highs in December and February.  At this point, the value of a pair of copper contracts had a 15% premium over the value of one gold contract.

Based on history, it seemed that this was merely a consolidation phase before the next leg higher.   After all, previous instances where two copper contracts traded at a discount to the value of one gold contract were followed by major trend reversals that ran the value of two copper contracts to a premium of 66% or more to the value of one gold contract.  This meant that the expectation of more upside was significant.

Alas, the market didn’t take out feelings, wishes, and hopes into account.  The copper(x2)/gold spread has been steadily eroding and taking back some of our open profits.  It’s now approaching the 200-day Moving Average as well.  A close below the 200-day MA for the first time since October could accelerate the decline.  Therefore, it makes sense to cash in our chips and wait for another hand to be dealt before we place anymore bets on this spread.  However, we won’t complain: the trade will net us a profit of nearly +$23,000 per spread.

July-June Copper Gold spread daily

July-June Copper Gold spread daily

For the December copper(x2)/gold spread, a Fibonacci .618 retracement of the run up would set technical support at -$12,428.  If the spread gets back down to this level, we will be watching to see if some sort of setup materializes to allow us back on board.

Trade Strategy:

Sell the two July copper contracts and simultaneously buy back the one short June gold contract at the market-on-close on Monday, June 5th. 



Gold/Silver Spread: The Next Big Move?

A Personal Note

Readers may have noticed that posts on the IMC blog have been sparse as of late.  This has been due to time constraints as I’ve been juggling several projects, including a potential launch of an RIA.  (As you would probably guess, the firm will be considered an “active manager” of assets.)  

This may or may not impact how I’m allowed to continue blogging on the subject of spread trading in the futures markets.  Until then, I will try to make a few posts on some current opportunities.  Should anything change because of the RIA business, I will keep you updated.

Tip of the Iceberg

Last year, the gold/silver ratio clipped the double top that was established just above 80:1 in 2003 and 2008.  It then rolled over and triggered a Wash & Rinse sell signal.  Based on historical precedent, I provided an argument for why I expected this to be the start of a wicked decline that could ultimately send the ratio below 50:1.

Gold Silver ratio monthly

Gold Silver ratio monthly

This outlook for a decline in the gold/silver ratio was intrinsically a bullish outlook for precious metals.

The ratio bottomed a little below 66:1 last summer, went into a messy trading range for several months, and finally made a sizable bounce from late March into early May.  It never came close to the downside target I was and am expecting.

Here’s what recently caught my attention: the early May multi-month high of nearly 76:1 just happened to be right near the Fibonacci .618 retracement of the entire decline from the March 2016 twenty-one year high to the July 2016 multi-month low.  It also coincides with the bounce high from last May.

Gold Silver ratio daily

Gold Silver ratio daily

After tagging this resistance area three weeks ago, the gold/silver ratio has been backing down.

Based on the fact that the initial downside objective of 50:1 or lower has not been achieved and the fact that the ratio rolled over after hitting resistance, I can’t help but think this could be the start of another sizable down move…maybe even the one that finally takes it to 50:1.

Backed By the Buck

Remember, a drop in the gold/silver ratio usually means that precious metals are on the upswing.  This is because silver tends to move faster than gold.  When the ratio rises (like over the last few months), it is because silver is dropping faster than the gold.  Conversely, when the ratio drops, it is because silver is moving up at a faster rate than gold.

Many people know that there often tends to be an inverse relationship between precious metals and the US dollar.  Therefore, a decline in the greenback should be supportive of an increase in the price of precious metals and, by extension, a drop in the gold/silver ratio.

As it turns out, there is mounting evidence that the greenback is on the downswing.  This is supportive of the idea that the gold/silver ratio should be heading lower from here.  I will shortly be publishing a post on Martin Kronicle that lays out the reasons that the US dollar has peaked.  In broad strokes, though, it’s due to monetary policy, cycles/seasonal patterns, and recent price behavior.

US Dollar index daily

US Dollar index daily

Let me also state for the record that I am not a gold bug.  I am a gold bull when prices are moving higher and I am a gold bear when prices are moving lower.  My only intent is to be positioned on the right side of the trend in precious metals.  As famous speculator Jesse Livermore said, “There is only one side of the market and it is not the bull side or the bear side, but the right side.”

Trading the Spread

The December gold/silver ratio closed a little below 73:1 on Friday.  Currently, the closest that a trader can get to creating a ‘dollar neutral’ spread position in the futures market is to trade 100 ounces of gold against 7,000 ounces of silver.  This can be accomplished by shorting one 100 oz. gold futures contract, buying one 5,000 oz. silver futures contract, and buying two 1,000 oz. ‘mini’ silver futures contracts.

Not surprisingly, the price chart for the December gold (100 oz.)/silver (x7,000/oz.) spread looks very similar to the chart of the gold/silver ratio in that it recently hit an eleven-month high, clipped the major Fibonacci .618 resistance line, and then rolled over.  Technically, this appears to be a good reason to take a shot at the short side of the trade.

December Gold (100 oz) Silver (7,000 oz) spread daily

December Gold (100 oz) Silver (7,000 oz) spread daily

The midpoint of the current pullback is at +$6,520 (premium gold).  That’s nearly $2,500 from the current pullback low.  Since the prior bounce off the May 16th low was $2,141, getting a bounce to the current midpoint doesn’t seem all that difficult.  Therefore, a bounce to +$6k is not an unreasonable expectation.

The May multi-month high of +$8,982 is near-term resistance.  Shorting a bounce to +$6k and exiting on a two-day close above +$9k seems like a logical play.  If so, it would set an initial risk expectation of somewhere in the neighborhood of $3,000.

It is important to keep in mind, however, that this isn’t a guaranteed cap on the risk because we have no idea how far above +$9k the spread could close if it moves adversely.  But we can at least use it to give us some sort of rough estimation of the reward-to-risk profile on the trade.

If our thesis is correct, the spread should not have any problem returning to the 2016 low of -$9,315 (premium silver).  This is the minimum downside expectation.  Shorting at +$6k with an initial risk of approximately $3,000 on the trade puts the reward-to-risk ratio at 5-to-1 if the minimum downside expectation is met.

But a ratio of 50:1 (our minimum macro projection) implies that the gold (100 oz.)/silver (x7,000/oz.) spread would be priced somewhere between -$35,000 and -$51,000 (premium silver).  With that sort of price target, the initial risk of approximately $3,000 sets the reward-to-risk ratio on the trade somewhere between nearly 14-to-1 and 19-to-1.

On the one hand, the reward-to-risk may be a little overstated since we cannot ascertain the exact risk on the initial trade.  On the other hand, we didn’t do any projections on the impact that pyramiding would have if we add to the position if the trend unfolds in our favor.  That seems like a fair trade-off to me.

As a speculator, this kind of a potential payoff seems like a pretty smart bet.

Trade Strategy:

Place a hypothetical order to sell one December 100 oz. gold futures contract, buy one 5,000 oz. silver futures contract, and buy two 1,000 oz. silver futures contracts if the December gold (100 oz.)/silver (x7,000/oz.) spread closes at +$6,000 (premium gold) or higher.  Initially, liquidate the position on a two consecutive day close above +$9,000 (premium gold).   

Bund/BOBL spread: Exit June Contracts

Move to the Sidelines

The IMC blog is holding a short position in the June Bund/BOBL spread that was originally entered on October 10th.  Due to rollovers, the entry price is the equivalent of 30.73.

The nearest-futures Bund/BOBL spread has been stuck in a consolidation zone for the last few months.  Initially, the trading range was defined by the price range that followed the bounce in the second half of December.  But a failed breakout above the range in late February and a failed breakout below the range in early March reset those boundaries.  After that, it’s been about as exciting as watching paint dry.

Bund BOBL spread (nearest-futures) daily

Bund BOBL spread (nearest-futures) daily

The September spread is priced more than a full point higher than the June spread and is currently trading higher than the late February price peak, basis the nearest-futures.  Therefore, the expiration of the June contracts will cause the nearest-futures chart to show a breakout above the top of the range.  This is bullish price behavior and not a good development for bearish bets on the European yield spread.  On this basis, the blog is going to simply exit the June spread without entering a September spread.  In other words, we’re not rolling over.

Since at least December, the September Bund/BOBL spread has made a series of higher lows.  A double top that was established at the January and February highs was surpassed at the end of April below a pullback occurred into the first half of May.  This is bullish.

The spread has been in an upswing since the May 9th correction low was established 29.95.  So far, three-quarters of the pullback has been recovered.  Things still look good for the bull side of the spread.

September Bund BOBL spread daily

September Bund BOBL spread daily

A break of the May low would throw a wrench in things as it would put the nearest-futures spread back into the trading range and also crack near-term price support for the September spread.  This would be a good reason to reenter a short position.

Trade Strategy:

Exit the hypothetical short position in the June Bund/BOBL spread at the market.  Work a hypothetical order to short the September Bund/BOBL spread on a close below the May low of 29.95.  If filled, liquidate the position on a two consecutive day close above the contract high that precedes the entry (currently at 32.15).