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.

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Platinum/Gold Spread: Roll to Halloween Contracts

The Long Road

The blog is holding an unleveraged April platinum/gold spread from the equivalent of -$206.30 (premium gold).  It was originally entered in September of 2015.  Boy, it’s been a looooong year and a half.

Leveraged was briefly added in April 2016, but the ‘add-on’ investment position was liquidated just a couple of months later.  This was because the uptrend failed to materialize.

This unleveraged spread position is experimental as it deviates from our normal trading rules of getting in and then exiting if there is an adverse move.  The idea was that a mean reverting commodity spread at record lows (it hit an all-time low of -$343.30 on June 27th and then nearly matched it on October 21st when it traded to -$337.30) with a confirmation on the ratio (it registered a thirty-three year low of 0.7335:1 on October 21st) would be a temporary event.

Platinum Gold spread (nearest-futures) daily

Platinum Gold spread (nearest-futures) daily

Furthermore, platinum has been priced at a discount to gold for a record two years and two and a half months, which is substantially longer than the prior record inversion streak of one year and seven months (September 1981 and April 1983).  In terms of both price and time, the historic extremes argue that a major reversion is long overdue.

The $64,000 question, of course, is “when will it finally happen?!”

Until we get more clarity on the situation, we remain unleveraged on the position.  But once a breakout above -$200 takes place, we’ll pay closer attention.  When that happens, it will time for a challenge of the 2016 high at -$161.20.  If this hurdle is cleared, the odds are pretty good that this record bear market is finally over.  Until then, we’ll patiently roll the contracts and bide our time.

Investment Strategy:

For tracking purposes, the blog will liquidate the long April platinum/gold spread investment position and simultaneously enter a long investment position in the October platinum/gold spread at the market-on-close on Tuesday, March 28th.  There are currently no liquidation parameters for this low-leverage position.  Factoring in the results of one ‘add-on’ investment position, the bankroll for this spread is currently $101,920.

Crude/Nat Gas Spread: Catching The Falling Knife

Spreading the Energies

Some of my favorite spreads are in the energy sector.  In particular, I love to trade the crack spreads.  But there’s also another lesser-known energy spread in my bag of tricks: crude oil against natural gas.

A few years ago, the correlation between crude and nat gas broke down.  It lasted for a few years and was not resolved until 2014.  This made for some tough sledding for anyone trying to trade the two markets against each other.  But since the correlation has been back to normal over the last three years, the odds of successfully trading the spread have gone up.  To that end, it looks like a buying opportunity is shaping up right now.

Making Plans for Labor Day?!

Two days ago marked the first day of spring.  Ironically, the trade opportunity that popped up on my radar screen yesterday is for the Labor Day (September) contracts.  I guess that’s why these are called futures contracts, right?

A crude oil futures contract controls 1,000 barrels of crude and a natural gas futures contract controls 10,000 MMBtu (million British thermal units) of nat gas.  To simplify the spread, I plot the difference between the actual values of the contracts.

Over the last couple of years, one September crude oil contract has been worth anywhere from 40% more to a little more than double the value of one September natural gas contract.  Therefore, the blog has been plotting the spread between one crude oil contract and the sum of the value of two natural gas contracts.

Price Parameters

Yesterday the September crude oil/natural gas (x2) spread closed at -$15,930 (premium nat gas).  This was the lowest price it has been in fourteen months.

Notice that this was only the fourth time in the last year that the spread has closed at -$15,500 or lower.  The lowest closing price was the January 20, 2016 low of -$16,170 and the longest that it ever closed at -$15,500 or lower was two consecutive days.

September crude oil natural gas (x2) spread daily

September crude oil natural gas (x2) spread daily

Actually, I fudged on that count just slightly.  The August 2, 2016 close was -$15,430.  That’s only $70 away from the -$15,500 threshold, which is close enough in horseshoes and hand grenades.  So we’ll say it’s close enough for spread trading, too.

Each of the dips to -$15,500 or lower was followed by rebounds that took the September crude oil/natural gas (x2) spread north of -$6,000.  Now interestingly enough, each close above -$6,000 was also a short-lived excursion as well.  Once the spread achieved this level, it soon rolled over and plunged again.  It’s been a perfect trading range for nearly a year and a half.

In light of this, it looks like the trade opportunity here is to buy the spread now and look for a rally above -$6,000 before taking profits.  Also, an ‘add-on’ position could be purchased once the rebound starts.  So that’s exactly how the IMC blog is gonna play it.

Ratio Confirmation

The ratio between the values of a September crude oil contract and a September natural gas contract confirm what we’re seeing in the spread.  The ratio closed at 1.51:1 yesterday.  The last three times it closed at 1.52:1 or lower, a major recovery soon followed.

The biggest challenge for the ratio’s recovery happened in January 2016.  The ratio closed at 1.52:1 on January 12th and didn’t fully recover above this level until two weeks later.  During this time, the contract low of 1.4:1 was established on January 20th.

September crude oil natural gas ratio daily

September crude oil natural gas ratio daily

In the grand scheme of things, though, this extended stay at 1.52:1 or lower was not all that dramatic because the spread only stayed at -$15,500 or lower for two days.  This is why using both the spread and the ratio together is a good idea.

Trade Strategy:

For tracking purposes, the blog will make a hypothetical trade by buying one September 1,000 barrel crude oil contract and simultaneously selling two September 10,000 MMBtu (million British thermal units) natural gas contracts at -$15,500 (premium nat gas) or better.  Initially, the spread will be liquidated on a three-day close below -$16,500.

Trade Strategy for ‘Add-On’ Position:

For tracking purposes, the blog will make a hypothetical trade by buying one September 1,000 barrel crude oil contract and simultaneously selling two September 10,000 MMBtu (million British thermal units) natural gas contracts on a close at -$13,000 (premium nat gas) or higher.  Initially, this ‘add-on’ spread will be liquidated on a two-day close below -$15,500.

Cocoa/Sugar Spread: Getting Off the Ride

The Bear Campaign

The IMC blog began a short-selling campaign in the cocoa/sugar spread at the end of September 2015.  The nearly one and a half year ride came to an end last week when the spread finally made a two-consecutive day close above the declining 100-day Moving Average, basis the nearest-futures.  This was the first such occurrence since late April of last year.

Due to ‘add-on’ positions after the trade was initiated, several rollovers, and a change in the spread ratio, the blog was short the May cocoa/sugar spread from the equivalents of +$21,514.80, +$18,158.60, +$14,949.20, and +$1,199.20.  The premium on all the spreads was to the cocoa contract value.

Cocoa Sugar spread daily (100-day MA)

Cocoa Sugar spread daily (100-day MA)

The exit price occurred at the March 14th close at +$240.80, which happened to be the first time this year that the value of the cocoa contract closed at a premium to the value of the sugar contract.

The Results Are In

Excluding commissions, the trade resulted in a total profit of +$54,858.60.  When you take into account the fact that the initial risk in the trade was $5,409.20 (based on the September 30, 2015 entry) the trade resulted in a ten-fold return.

Ironically, the initial risk when the trade was entered was more than double what I had anticipated.  The reason for that was because the spread reversed from a multi-year high to a two and a half month low in just five trading days.  If the volatility had not spiked via a big expansion in the trading range, the trade could have produced a return of at least 20-to-1.  But hey, we have no reason to complain when we still made a profit that was ten times the risk!

Staying On the Radar

Although the blog is no longer in the cocoa/sugar spread, it does not mean that we will forget about it.  As a matter of fact, we are watching (and hoping!) to see if the bullish trend change will fail and put the spread back on track for new lows.

So far, the contract low for the May cocoa/sugar spread was established on Valentine’s Day at a low of -$3,764.40 (premium sugar).  If we are lucky, the spread will return to this level and maybe even break below it.

May Cocoa Sugar spread daily

May Cocoa Sugar spread daily

Does that mean we are looking to reenter a short position?  Not exactly.  The blog aims to initiate a trade position after a spread has come off of an extreme reading where prior price excursions have proven rare and unsustainable.  Furthermore, it has to be in the direction of a trend that is in agreement with a historical reversion to the mean.  These requirements currently exclude a short sale on the cocoa/sugar spread.

Bears Breed…Bulls?!

The reason that we are hoping for a break to new lows is because it would put the cocoa/sugar spread on our candidate list for a potential trade on the long side.

Say what?!

Yep, you read that right.  We will be looking for a setup to go long on the spread.  Historically, bear markets in the cocoa/sugar spread have been near completion when the spread has declined below -$3,500 (premium sugar).

After a month end close below -$3,500 (premium sugar) on the nearest-futures monthly chart, the spread has usually bottomed out within a few months.  The longest it took was seven months when the spread closed below -$3,500 in June 1989 and hit the final closing low in January 1990.  Furthermore, the spread has never stayed below -$3,500 on a monthly closing-basis for more than a year.

Cocoa Sugar spread (nearest-futures) monthly

Cocoa Sugar spread (nearest-futures) monthly

Here’s the catch, though: although the cocoa/sugar spread closed below -$3,500 on the daily timeframe last month, it has not yet closed below -$3,500 on the nearest-futures monthly timeframe.  Last month’s close was -$2,107.60.  Therefore, the spread still hasn’t triggered our qualification for a trade candidate on the long side.

Even though we don’t currently see anything to do in the cocoa/sugar spread, now you know why we are continuing to at least monitor it.  I highly suggest you put this on your watch list as well.

 

Bund/BOBL Spread: Roll to June

Thinking About Summer

The IMC blog is holding a short position in the March Bund/BOBL spread that was entered at the equivalent of 31.93 on October 10th.  March contracts expire soon, so we’re going to roll to the June contracts.

The June spread closed at 28.94 on Friday, which is nearly a one and a quarter point discount to the March spread.  This puts the new spread right at a support zone on the weekly nearest-futures chart between the December and January lows of 28.91 and 29.09, respectively.  Once this support level is broken, there is nothing to stop the Bund/BOBL spread from descending to the next technical support level at a weekly Fibonacci .618 retracement at 26.13 (as measured between the 2015 low and the 2016 high.

euro-bund-euro-bobl-spread-weekly

Euro Bund Euro BOBL spread weekly

If the spread does not end its decline somewhere around this important support level, it may try to replicate the 9.40-point decline from last year’s record high.  If so, the next downside target will be at 24.74.

Trade Strategy:

Exit the hypothetical short March Bund/BOBL spread and simultaneously enter a short June Bund/BOBL spread at the market-on-close on Monday, March 6th. 

Cocoa/Sugar Spread: Roll to May Contracts

The Bear Continues

The IMC blog has been on a short sale campaign in the cocoa/sugar spread for nearly seventeen months.  Thanks to the initial position and some ‘add-ons’ we picked up, the blog is short a March cocoa/sugar spread from the equivalent of +$21,866 (premium cocoa), short a second March cocoa/sugar spread from the equivalent of +$18,509.80 (premium cocoa), short a third March cocoa/sugar spread from the equivalent of +$15,300.40 (premium cocoa), and short a fourth March cocoa/sugar spread from the equivalent of +$1,550.40 (premium cocoa).

The bear market remains in full force, so we will remain short.  Currently, it will take a two-consecutive day close above the declining 100-day Moving Average to tell us that the trend has changed and prompt us to take the money and run.  That hasn’t happened since last April.

cocoa-sugar-spread-nearest-futures-daily

Cocoa Sugar spread (nearest-futures) daily

Furthermore, we are waiting to see what happens if/when the spread drops to -$4,000 (premium sugar).  Prior bear markets in the cocoa/sugar spread ended after this level was reached and set the stage for bull markets.  That means we will start thinking about trading the long side of the cocoa/sugar spread if it makes down to this area.

Trade Strategy:

On the four March cocoa/sugar spreads entered at the equivalents of +$21,866, +$18,509.80, +$15,300.40, and +$1,550.40 (premium cocoa), roll to the May spreads at the market-on-close on Friday, February 24th.  Risk all four spreads to a two-consecutive day close above the declining 100-day Moving Average, basis the nearest-futures.  

 

T-bond/T-note Spread: Roll to the June Contracts

Waiting For the Next Shoe to Drop

The IMC blog initiated a short position in the March T-bond/T-note spread at 26-18 (premium bonds) on January 20th.  For the last month, we’ve had little to show for our efforts as the spread has remained range-bound.

However, the spread did flash a major bearish signal back in early October when it closed below the widely-watch 200-day Moving Average for the first time since the first week of 2016.  We felt that the right move was to get short once the rally off the December low started to fade.  We still think that.

t-bond-t-note-spread-50-and-200-mas-daily

T-bond T-note spread (50 and 200 MAs) daily

A breakout above the current trading range would be our signal to take a loss on this initial trade and get to the sidelines.  If that occurs, it would increase the possibility of a rally to resistance at the declining 200-day MA where we would watch for a setup to take another crack at it.  Until then, we simply stay short.

First Notice Day for the March treasury contracts is on Monday.  Therefore, we have to roll to the June contracts today in order to maintain our position.

Trade Strategy:

Liquidate the short March T-bond/T-note spread and simultaneously enter a short June T-bond/T-note spread at the market-on-close on Friday, February 24th.  Risk the June spread to a two-day close above 27-24.  

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.

 

Copper/Crude Spread: Rollover Update

Overdue Update  

The IMC blog entered a short position in the March copper/crude oil spread at +$13,265 (premium copper) on December 1st.  We rolled to the May contracts at the market-on-close last Friday (February 17th) because Monday was the Last Trading Day for the crude contract.

Alas, I had a blog post all queued up for the rollover last Friday and forgot to send it!  If you have a decent broker, however, they should have given you notice that the March crude contract needed to be liquidated or rolled.

On February 17th, the March copper/crude oil spread closed at +$14,275 and the May copper/crude oil spread closed at +$13,880.  Therefore, the discounted price would put us in the May spread at the equivalent of +$12,870.

may-copper-crude-oil-spread-daily

May Copper Crude Oil spread daily

As a reminder to why the blog initiated a short position, it is because the nearest-futures copper/crude oil spread signaled a bearish trend change after peaking out at +$20,640 in late November.  Historically, prior runs to +$17,000 or higher have been followed by major bear markets that hammered the copper/crude oil spread down to where crude oil had a premium of $10,000 or more over the copper.  Therefore, this could be just the start of a major decline.  We will be watching for setups to add to the short position along the way.

Copper/Gold Spread: Stay Long For More Upside

Keep ‘Em Rollin’

Currently, the blog is holding a long position in the March-February copper(x2)/gold spread from the equivalent of -$22,700 (premium gold).  It was entered on September 29th.

We’re still happy with the position.  But with the February gold contract expiring on Friday and the First Notice Day for the March copper contract hitting next Tuesday, it’s time to roll out into the later contracts.  Since the summer spread (July-June) is only about $300 more than the spring spread (May-April), we’re going to opt for more time and hop into the summer spread.

Since peaking out just above +$17k (premium copper) on December 5th, the July-June copper(x2)/gold spread has been stuck in a trading range.  The spread clipped the December 5th high last week, but has retreated once again.  What we need to see is a sustained close above the early December/mid-February high to get the momentum going again.  If that happens, the spread will stay on track for a run to the resistance zone between the 2015 high of +$28,190 (premium copper) and the November 2014 high of +$34,380 (premium copper).

july-june-copper-gold-spread-daily

July June Copper Gold spread daily

But remember that we mentioned before that the ratio between copper and gold (currently around 0.56:1) indicates that the spread could go substantially higher than the 2014/2015 price peaks!  Historically, prior occurrences where two copper contracts traded equal to or at a discount to the value of one gold contract were followed by major bull markets.  Each one lasted until two copper contracts were valued at a minimum premium of 66% over the value of one gold contract.  That puts the ratio at 1.66:1.

To hit this minimum ratio target of 1.66:1, the copper(x2)/gold spread would have to soar to somewhere between roughly +$53k (if the current copper price remained the same) and roughly +$78k (if the current gold price remained the same).

Based on this history, we are watching the spread carefully to see if a setup materializes to add to the long position after a breakout above the current trading range.  We’ll keep you posted if that happens.  For now, though, let’s roll out to the summer contracts.

Trade Strategy:

Sell the two March copper contracts and simultaneously buy two July copper contracts at the market-on-close on Wednesday, February 22nd.  Also, buy back the one short February gold contract and simultaneously sell one June gold contract at the market-on-close on Wednesday, February 22nd.