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.

 

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Feeder/Corn Spread: Time to Rollover

Staying the Course

The IMC blog is holding a short position in the March feeder/corn (x4) spread from the equivalent of -$8,487.50 (premium corn).  We’ve been in this position since September 6th and patiently rolling over.  It’s time to do it again.

The spread will be rolled to the April and May contracts.  Based on the current prices, this will end up readjusting our equivalent entry level to somewhere around -$9,700 (premium corn).

feeders-corn-x4-spread-weekly

Feeders Corn (x4) spread weekly

So is it worthwhile to stay short?  We think so.  As you can see on the weekly timeframe, near-term support is located at last year’s low of -$18,837.50 (premium corn).  A clean break below this level could clear the way for a decline to the 2012 high of -$31,612.50.  Remember the technical charting rule: Old price resistance, once it has been broken, becomes new price support.

Trade Strategy:

Buy back the short 50,000 lb. March feeder cattle contract and simultaneously sell short an April feeder cattle contract at the market-on-close on Friday, February 24th.  Also, sell the four 5,000 bushel March corn contracts and simultaneously buy four 5,000 bushel May corn contracts at the market-on-close on Friday, February 24th.  Risk the April-May feeder/corn (x4) spread to a two-day close above even money.

 

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.

Feeder/Corn Spread: Back In a Bearish Bet

Headed South For the Winter

On September 6th, the IMC blog entered a short position in the Nov-Dec feeder/corn (x4) spread.  We sold a November feeder contract short at 126.075 (contract value of $63,037.50) and bought four December corn contracts at $3.28 1/2 (a sum contract value of $65,700), which puts us in the position at a price of -$2,662.50 (premium corn).

Initially, we are going to risk the trade to a two-day close above +$5,500 (premium feeders).  That’s nearly $500 above the August 30th contract high.

Bearish Technical Outlook

First of all, a double top pattern was formed between the August 9th high of +$4,962.50 and the August 30th high of $5,012.50.  Yesterday’s close below the August 19th low of +$237.50, which is the lowest point between the two highs, confirmed the pattern.

Secondly, the spread closed below the rising 50-day Moving Average for the first time since mid-June.

nov-dec-feeder-corn-x4-spread-daily

Nov-Dec Feeder Corn (x4) spread daily

Next, the nearest-futures spread closed above the widely-watched 200-day Moving Average at the start of August for the first time in a year.  This was a bullish event.  But here at the start of September, the nearest-futures spread closed back under the 200-day MA.  This could indicate that the party is over.

The spread should now be on its return trip to the mid-June low of -$23,650 (premium corn).  Based on history, a clean and sustained break of this low should clear the path for a descent to the -$40k area.  You can be that we’ll be watching for pyramiding opportunities if the bear market persists.

Feeder/Corn Spread: Will the Breakout Last?

Sidelined

The IMC blog entered a short position in the feeder/corn spread on January 8th.  After a series of rollovers and ratio adjustments, the last position was a Nov-Dec feeder/corn (x4) spread short from the equivalent of -$1,237.50 (premium corn).

The spread was liquidated at +$3,775 (premium feeders) on August 4th, resulting in a loss of -$5,012.50.

The Current Stampede

The Nov-Dec feeder/corn (x4) spread posted a new contract high of +$3,837.50 (premium feeders).  The nearest-futures spread is at even loftier heights as it reached a nearly seven-month high of +$10,025 (premium feeders).  This is bullish.

Feeder Corn (x4) spread (nearest-futures) daily

Feeder Corn (x4) spread (nearest-futures) daily

With the nearest-futures spread clearing the widely-watched 200-day Moving Average for the first time in a year, the door is open for a run to the midpoint of the entire bear market decline from the 2014 all-time high.  This would put it somewhere in the neighborhood of +$18,500 (premium feeders).

Feeder Corn ratio (nearest-futures) weekly

Feeder Corn ratio (nearest-futures) weekly

Furthermore, the nearest-futures feeder/corn ratio is back up to 4.6:1.  Recall that the ratio is historically extreme and unsustainable when it gets above 4.8:1 (nearly five-to-one).  In the past, ratio peaks above 4.8:1 have been followed by declines back below 3:1.  This last bear market only made it to 3.14:1.  So keep your eyes open.

Who’s the Sucker?

Since the Nov-Dec feeder/corn (x4) spread is at new record highs and still trading at a discount of several thousand dollars to the nearest-futures spread, there’s plenty of upside potential.

Nov-Dec Feeder Corn (x4) spread daily

Nov-Dec Feeder Corn (x4) spread daily

However, markets sometimes breakout and suck everyone in before rolling over and crushing the unsuspecting.  Now that the spread has broken out to new contract highs, a close back below support at the July 29th pullback low of -$925 (premium corn) and a close below the rising 20-day Moving Average (currently around -$1,045) for the first time since mid-June could be a strong clue that this breakout attempt was a sham.  If so, it might be worth taking a crack at the short side again.

Trade Strategy:

Place a hypothetical order to sell short one 50,000 lb. November feeder cattle contract and simultaneously buy four 5,000 bushel December corn contracts if the Nov-Dec feeder/corn (x4) spread closes below the July 29th low of -$925 (premium corn).  If filled, risk a two-day close $500 above the contract high that precedes the entry.

Feeder/Corn Spread: Adjust the Spread for the Ratio

Recalibrate

The IMC blog is currently holding a short position in the August-September feeder/corn (x5) spread.  Due to a prior rollover, the spread is short from the equivalent of -$15,325 (premium the sum of the five corn contracts) on January 8th.

The spread has made a monster-size rally over the last three weeks as the corn market fell on its ear.  With a summer delivery contract in feeders, we’re now looking to roll into further out contracts.  In addition, the ratio of the spread is going to be adjusted.

At this week’s high, the ratio between the value of one November feeder contract and one December corn contract closed just above 4:1.  This matched the April high of 4.02:1 and was just a tad beyond the March high of 4:1.  The high for the year, set on January 4th, was only a bit further at 4.16:1.  By all appearances, it would seem that the ratio is at stiff resistance.

Nov-Dec Feeder Corn ratio daily

Nov-Dec Feeder Corn ratio daily

Looking at the last forty-five years of monthly closing prices, a ratio of 4:1 is a high level.  And keep in mind that it’s just coming off of an all-time high of 7.34:1!  There should be more downside ahead.

To normalize the spread between feeders and corn when the ratio is 4:1, you need to spread one feeder contract against four corn contracts.  Therefore, the blog is going to roll to the November-December spread and adjust the ratio down to normalize.

Trade Strategy:

Buy back the one 50,000 lb. August feeder cattle contract and simultaneously sell short one 50,000 lb. November feeder cattle contract at the market-on-close on Friday, July 8th.  Also, sell the five 5,000 bushel September corn contracts and simultaneously buy four 5,000 bushel December corn contracts at the market-on-close on Friday, July 8th.

This will roll the short Aug-Sep feeder/corn (x5) spread position into a short Nov-Dec feeder/corn (x4) spread position.  Risk the Nov-Dec spread to a two-day close above +$3k (premium feeders).

Feeder/Corn Spread: It’s Rollover Time!

Time to Roll

The IMC blog entered a short position in the April-May feeder/corn (x5) spread at -$11,462.50 (premium the sum of the five corn contracts) on January 8th.  Since the First Notice Day for both of these markets hits next week, it’s time to roll over.

At yesterday’s new contract low of nearly -$24k, it would appear that the April-May feeder/corn (x5) spread has already declined enough.  However, history indicates that the spread could still have significant downside ahead.

First of all, the spreads prior excursions to ‘even money’ or better (where one feeder contract was worth at least the same value as the sum of five corn contracts) were followed by multi-month/multi-year declines to -$50k, -$38k, and -$133k (!).

Feeder Corn (x5) spread (nearest-futures) weekly

Feeder Corn (x5) spread (nearest-futures) weekly

In addition, the ratio between a 50,000 lb. feeder cattle contract and a 5,000 bushel corn contract is a little under 4:1 today.  The normal level for the ratio is somewhere around 3:1.

The ratio peaked at an eye-popping record high of nearly 7.5:1 about a year and a half ago.  It has been working its way lower since.  Prior peaks near 5:1 or higher were followed by declines that put the ratio below 3:1.  The 1987 peak of 4.98:1 was followed by a decline to nearly 2:1 the following year and the 2005 peak of 6.15:1 was followed by a decline to 1.5:1 over the next two and a half years.

To reach a ratio of 3:1, the feeder/corn (x5) spread would have to decline to somewhere between -$39k and -$50k.  That’s another $18,000 to $28,000 from where the spread sits today.  And if the ratio is heading to 2:1 or lower…well, I’ll let you do the math on that.  It’s certainly worth your while to be short.

We are going to roll the position to the August-September spread.  We will also monitor the spread vigilantly for setups to add to the position.

Trade Strategy:

Buy the one 50,000 lb. April feeder cattle contract and simultaneously sell one 50,000 lb. August feeder cattle contract at the market-on-close on Friday, April 22nd.  Also, sell the five 5,000 bushel May corn contracts and simultaneously buy five 5,000 bushel September corn contracts at the market-on-close on Friday, April 22nd.  This will roll the short April-May feeder/corn (x5) spread position into an August-September feeder/corn (x5) spread position.  Risk the August-September spread to a two-day close above -$9,000 (premium the sum of the five corn contracts).

Feeder/Corn Spread: Reentry Signal Triggered

Back In the Rodeo

The IMC blog reentered the short side of the feeder/corn spread today when April feeder cattle broke support at last week’s low.

The short position was entered by selling one 50,000 lb. April feeder cattle contract at 158.325 (contract value of $79,162.50) and simultaneously buying five 5,000 bushel May corn contracts at $3.62 1/2 (a total contract value of $90,625). Therefore, the position is short from -$11,462.50 (premium the sum of the five corn contracts). The initial exit criteria will be to liquidate on a two-consecutive day close above -$6,462.50 (premium corn).

April Feeder Cattle weekly

April Feeder Cattle weekly

As noted in the prior post, the break below a previous week’s low in feeders would indicate that the bear market rally is over. The fact that it happened after testing resistance at the declining 50-day Moving Average (basis the nearest-futures) was already a good sign, but the fact that it resulted in an ‘outside bar’ with a downward reversal on the weekly timeframe is even better. If this is the resumption of the downtrend for the spread, we will be watching for opportunities to add to the position.

Feeder/Corn Spread: Setup For a Reentry

Still Riding the Bear

The feeder/corn spread topped out at a historic high fifteen months ago. Since then, IMC has been in and out of this spread on the short side as we’ve tried to capitalize on the bear market.

Feeder Corn ratio (nearest-futures) monthly

Feeder Corn ratio (nearest-futures) monthly

The normal ratio between a 50,000 lb. feeder cattle contract and a 5,000 bushel corn contract is somewhere around 3:1. It peaked at a record high of nearly 7.5:1 in Q4 of 2014 and has been stair-stepping its way lower ever since. In nearly half a century of price data, there have been about half a dozen times when the nearest-futures feeder/corn ratio has been at 4.8:1 (nearly five-to-one) or higher. The prior runs to this level have ultimately been followed by a return to 3:1 or lower. Therefore, we continue to look for short sale opportunities as the trend progresses on a south-bound trajectory.

Ready to Roll

After posting a new contract low in mid-December, the feeder/corn ratio made a sharp rebound into year-end. It was due to a combination punch of the rally in livestock, prompted by position-squaring of short positions and cold weather finally arriving in the US, and the corn market falling on its ear as concerns of El Niño fade away while supplies remain abundant. The momentum is continuing here in the first trading week of 2016.

The bearish macro fundamentals remain in place. After the US drought wiped out supplies and sent the cattle market stampeding to record highs, cow herds started to expand again in 2015. This is expected to continue in 2016, while US exports are already at multi-year lows and imports are at multi-year highs.

On the feed side of the spread, corn prices have pretty much been in a trading range over the last year. Large supplies have capped the upside, but demand has materialized several times when the market dipped below $3.50-per-bushel.

This scenario makes us think that this recent price recovery in the spread is merely a bear market rally and, therefore, a selling opportunity.

Consulting the Charts

From a technical perspective, the recent price action indicates that the bounce is now testing resistance levels.

Over the last three years, the best way to make money in the feeder cattle (basis the nearest-futures) was to be long on a long on a close above the 50-day Moving average and short on a close below the 50-day Moving average. This trend reversal signal has been highly accurate.

Feeder Cattle (nearest-futures) daily

Feeder Cattle (nearest-futures) daily

After a bearish trend change signal was triggered last June, the 50-day MA has provided resistance for feeders. The 21.65 cent bounce off the October low ended after the market tagged the 50-day MA. A decline to new bear market lows followed. Currently, feeders have rallied a little over 26 cents off the December low and they are pushing on the 50-day MA. A reversal from here would be a low-risk selling opportunity. However, a two-day close above the 50-day MA for the first time since June would trigger a bullish trend change signal. This should not be ignored. We’ll let the market tell us if we should get short or not.

April Feeder Cattle weekly

April Feeder Cattle weekly

April feeders have made higher weekly highs for three consecutive weeks and it is now approaching the Fibonacci .618 retracement of the leg down from the October bounce. If the contract does not trade to 158.45 or lower by Friday, this will also be the third consecutive week with higher weekly lows. This is turning into bullish price structure. However, a break below a prior week’s low would negate that and indicate that the bear market in feeders is continuing. A break below a prior week’s low might be a good short sale signal. It certainly worked out that way after the rally crested in October.

The nearest-futures corn contract dropped to a four-month low of $3.50 1/4 to kick off the New Year. This puts it within striking distance of price support in the $3.40s. The market bottomed in this area in May, June, August, and September of 2015, so it represents the bottom of a trading range.

Corn (nearest-futures) daily

Corn (nearest-futures) daily

The catch is that we’re watching the May futures contract for the trade. May corn has made new contract lows in three of the last four weeks as it bleeds off the carry-charge. It may also make lower weekly highs for the fourth-consecutive week. This is bearish price structure. Therefore, it might take a breakout above a prior week’s high to indicate that corn is ready to pop again.

Spread Behavior

Now that we’ve taken a peek at the feeder market and the corn market, the next logical step is to examine the price action of the spread and the ratio.

April-May Feeder Corn (x5) spread daily

April-May Feeder Corn (x5) spread daily

The April-May feeder/corn (x5) spread traded just past the October peak this morning. So far, the spread has rallied a little more than $16,000 off the contract low. This was noticeably more than the $11,487.50 rally from the early October low, but not quite as much as the $18,437.50 rally off the mid-July low. Based on the size of the current rally and the price level, we can probably say that the spread has reached a resistance area. If it rolls over from here, especially after testing resistance at the prior bounce high, a short sale makes sense. If it does not roll over, the spread may advance toward psychological resistance at the ‘even money’ mark next.

April-May Feeder Corn ratio daily

April-May Feeder Corn ratio daily

The April-May feeder/corn ratio reached a two-month high of 4.61:1, putting it just below the October peak at 4.65:1. The bounce is about the same size as the bounce from the mid-July low. This is an ideal place for a reversal. Conversely, a sustained close above 4.65:1 could clear the way for a stampede toward the August high of 5.12:1. Our thoughts remain consistent: Short the spread if it starts to roll over, stay patiently on the sidelines if it does not. Once we get back in, we’ll be looking for setups to add to the position.

Trade Strategy:

The blog will work a hypothetical order to sell one 50,000 lb. April feeder cattle contract and simultaneously buy five 5,000 bushel May corn contracts if April feeder cattle trades .15 below a prior week’s low. Initially, the spread will be liquidated on a two-consecutive day close $500 above the multi-month rally high that precedes the entry (currently at -$7,137.50).

Feeder/Live Cattle Spread: Time To Take Profits

Corralling the Profits

The IMC blog is holding a short position in the November-December feeder/live cattle spread from the equivalent of +$41,820 (premium feeders). The November feeder contract expires next week, so we are going to go ahead and close out the position.

Still Heading South

Looking at the monthly timeframe, one can see that the feeder/live cattle spread has been in a downtrend since it peaked at a record high last year. There appears to be plenty of downside ahead. Therefore, we will now be monitoring the March-February feeder/live cattle spread for potential setups to get positioned back on the short side.

Feeder Cattle Live Cattle spread monthly (nearest-futures)

Feeder Cattle Live Cattle spread monthly (nearest-futures)

Trade Strategy:

The blog will exit the hypothetical short position in the November-December feeder/live cattle spread at the market-on-close today on November 10th.