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. 

 

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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.

 

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.

Cattle/Hog Spread: About Ready To Roll?

Welcome To the Meat Market

Historically, the cattle market and the hog market show a strong correlation in price trends.  Not all the time, but enough to see an obvious relationship.  This makes the relationship between the two meat markets a good candidate for spread trading.

live-cattle-lean-hog-overlay-weekly

live cattle lean hog overlay weekly

The fact that there are some periods where the correlation weakens is actually a good thing.  Trend followers can exploit the correlation breakdown and profit from the outliers, while knowledgeable spread traders can use such instances as an opportunity to start strategizing and getting themselves positioned for an eventual reversion to the mean.

Since peaking out in late 2014, the cattle and hog markets have pretty much trended in the same direction.  The correlation is very high.  Since there appears to be no divergence between the two markets right now, the question a trader might ask would be “Is there any worthwhile trading opportunity in the cattle/hog spread right now?

The Ratio Says…

Looking at the last few decades of price history, it appears that the price of beef is too expensive once it costs at least double the price of pork.  Note the weekly nearest-futures closing price of the cattle/hog ratio and you only see about half a dozen instances where the ratio ran to 2:1 or higher.

live-cattle-lean-hog-ratio-nearest-futures-weekly

live cattle lean hog ratio (nearest-futures) weekly

Furthermore, we also see that once the ratio surpasses 2:1 (where the price of cattle is more the double the price of hogs) it’s only a matter of time until the trend makes a major reversal and the ratio collapses.  Usually it was only a matter of weeks until the top was established after surpassing 2:1.

As it turns out, the ratio between the February live cattle contract and February lean hog contract surpassed 2:1 just last week.  More intriguing is the fact that the current ratio rally high of 2.05:1 is just slightly above price resistance at the October 29th high of 2.02:1.

february-live-cattle-lean-hog-ratio-daily

February Live Cattle Lean Hog ratio daily

If the ratio rolls over right here after clipping the October 2015 high, then it will trigger a Wash & Rinse sell signal for the February cattle/hog spread.  This is a failed breakout pattern, which can lead to a sizable price reversal.

Since the ratio just reached 2:1, the blog will initially short one cattle contract and buy two hog contracts on a close back under 2:1.  This will give us a more dollar neutral position.

february-live-cattle-lean-hog-x2-spread-daily

February Live Cattle Lean Hog (x2) spread daily

If the ratio makes a new high after getting short, the position will be covered for a loss and new setup parameters will be issued.  Most likely, reentering on a break to new correction lows would be the trigger point.  At the same time, we will be cheering the spread on for a run to much higher levels in hopes that we see a new setup materialize at much higher (read unsustainable) price levels.

Trade Strategy:

The blog will work a hypothetical order to sell one 50,000 lb. February live cattle contract and simultaneously buy two 50,000 lb. February lean hog contracts if the February cattle/hog ratio closes below 2:1.  Initially, the spread will be liquidated if the ratio makes a two-consecutive day close above the multi-month rally high that precedes the entry (currently at 2.05:1).

Minneapolis/Chicago Wheat Spread: Time For a Turn?

Seeds of an Opportunity

Although the Chicago wheat contract is the world benchmark for wheat prices, the Minneapolis and Kansas City wheat contracts normally trade at a premium to the CBOT wheat.  This is because the Minneapolis hard red spring wheat and Kansas City hard red winter wheat are a higher protein content and, therefore, higher quality product that the CBOT soft red winter wheat.  The Minneapolis and Kansas City wheat is what buyers purchase for food production.

minneapolis-wheat-chicago-wheat-overlay-weekly

Minneapolis wheat Chicago wheat overlay weekly

As you would probably suspect, the price behavior of these three wheat contracts are highly correlated.  However, there are times when one or two of the markets will outperform the other.  This is where the spread opportunity lies.

Getting Pricey

In mid-August the nearest-futures Minneapolis wheat contract closed at a premium of more than $1-per-bushel to the Chicago (CBOT) wheat contract.  That doesn’t happen very often.  Historically, it appears to be ‘expensive’ whenever the Minneapolis wheat contract is at a premium of 70 cents over the CBOT wheat contract.

The problem with these old guidelines is that the spread has been substantially higher than 70 cents on a few occasions over the last several years.  The Minneapolis/Chicago wheat spread made it to nearly two and a half dollars at the end of 2011 before finally rolling over.  And the barn-buster, never-seen-before, all-time record high was made in 2008 when the spread finally put a flag on the moon and peaked at $8.53 (!) before crashing back to earth.

minneapolis-wheat-chicago-wheat-spread-weekly

Minneapolis wheat Chicago wheat spread weekly

The interesting thing, however, is that the bear markets that followed in this spread all had the same outcome.  Each time the Minneapolis wheat price reached a huge premium over Chicago wheat and finally ended the run, the reversal lasted until the price premium finally went to the Chicago wheat.  Even the outlier bull markets of 2008 and 2011 couldn’t escape this repetition of history.  Perhaps Mark Twain was correct when he said, “History doesn’t repeat, but it does rhyme.”

So the question is: Do we start looking for a reversal setup because the Minneapolis/CBOT wheat spread has surpassed the old watermark level of 70 cents…or do we wait for it to get somewhere in the vicinity of the 2011 level before stalking it?

The Ratio Filter

As readers of this blog already know, we like to use a ratio to filter what we see in the price spreads.  This is done to normalize false readings of outliers that appear on a spread chart when the prices of the underlying markets are themselves at record extremes.  Sometimes, the ratio can even be a tie breaker when deciding which spread to pursue as the trade opportunity with the highest probability of success.

Normally, the Minneapolis wheat contract will have a markup of roughly 10% over the CBOT wheat contract.  At ‘normal’ levels, you can flip a coin to determine which way the spread will go.  There’s not much of an edge at this level so we ignore it.

minneapolis-wheat-chicago-wheat-ratio-weekly

Minneapolis wheat Chicago wheat ratio weekly

Our antennas go up when the Minneapolis wheat exceeds a premium of 25% over the CBOT wheat.  This has happened about half a dozen times in the last four decades.  It never lasted.  As a matter of fact, the inevitable reversal that finally followed a reading above 1.25:1 drove the Minneapolis wheat all the way down to where it was priced at a discount to the CBOT wheat.  This certainly indicates that a premium of 25% or more makes the Minneapolis/Chicago wheat spread a short sale candidate.

Last month the nearest-futures Minneapolis wheat/CBOT wheat ratio surpassed 1.25:1.  Therefore, the ratio confirms what we already suspected with the spread: A short sale opportunity is shaping up here.

Dialing It In

Take a look at the December Minneapolis wheat/CBOT wheat spread.  Although it’s been in an uptrend since the start of 2016, the price action of the last few weeks could indicate that the trend is changing.

First of all, the spread peaked at +82 1/4 cents on July 5th and had a normal correction.  This price peak was briefly exceeded on August 22nd when the spread reached +84 1/2 cents and then quickly pulled back.  This appeared to be a Wash & Rinse (failed breakout) sell signal.

Then it gets even more interesting.  The December Minneapolis wheat/CBOT wheat spread made a new contract high of 89 cents on August 30th and then rolled over again the very next day.  This one-day high close was enough to disqualify the first failed breakout attempt, only to turn into a second failed breakout attempt.  It sure looks like the spread is having a hard time sticking at these levels.

december-minneapolis-wheat-chicago-wheat-spread-daily

December Minneapolis wheat Chicago wheat spread daily

Now direct your attention to the rising 75-day Moving Average.  The spread has closed above the 75-day MA every single day for over six months straight.  However, the spread has been on the defensive for the last three weeks and is now less than two cents away from support at the 75-day MA.  Initially, a close below the 75-day MA for the first time since the first half of March and a break of the August 25th reaction low could be the technical catalyst that confirms the end of the bull run.  If so, the short side of the December Minneapolis wheat/CBOT wheat spread seems like a good place to be positioned.

Trade Strategy:

The blog is working a hypothetical order to sell one December Minneapolis wheat contract and simultaneously buy one December Chicago wheat contract on a close below the rising 75-day MA (currently at +71 cents).  If filled, risk a two-day close of three cents above the contract high that precedes the entry (currently at +89 cents). 

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.

Soybean/Cotton Spread: Let’s Book the Profits

Taking the Money Off the Table

The IMC blog entered a short position in the Nov-Dec bean/cotton spread at +$22,365 (premium beans) on June 23rd.  Based on the way it has behaved in August, we’re inclined to book the profit and wait for a new setup to go back in.

First of all, the spread had price support at a double bottom between the August 21, 2015 low of +$11,382 and the December 28, 2015 low of +$11,430.  This support area was breached on August 1st and the spread stayed below this level for a full week.

Nov-Dec 2016 soybean cotton spread daily (support line)

Nov-Dec 2016 soybean cotton spread daily (support line)

This should have led to an accelerated decline toward the ‘even money’ level.  Instead, the spread reversed and closed back above the double bottom on August 9th.  This failed breakdown is something we call a Wash & Rinse pattern.  It’s a bullish sign.

The second bullish development for the Nov-Dec bean/cotton spread occurred on August 15th when it closed back above the 30-day Moving Average.  The January-June run higher was supported by the 30-day MA and the July meltdown was capped by the 30-day MA.  Now that the spread is back above the 30-day MA it is in a bullish position again.

Nov-Dec 2016 soybean cotton spread daily (3-day MA)

Nov-Dec 2016 soybean cotton spread daily (30-day MA)

The Nov-Dec bean/cotton spread made a sharp pullback last week and it seems to have stabilized above the 30-day MA.  Therefore, we’ll use it as an opportunity to cover the short position.  After that, we’ll monitor the spread for a setup to get back in.

Trade Strategy:

On the short position in the Nov-Dec bean/cotton spread entered at +$22,365 (premium beans), liquidate the position at +$14,865 or better.

Soy Meal/Bean Oil Spread: Bearish Pyramid Building Continues

Triple Play

The blog entered a short position in the September soy meal/bean oil (x2) spread at +$500 (premium meal) on July 7th.

The blog then entered a second short position in the September soy meal/bean oil (x2) spread at -$3,386 (premium bean oil) on August 2nd.

On August 15th the blog entered a third short position in the September soy meal/bean oil (x2) spread at -$5,892 (premium bean oil).

September Soy Meal Bean Oil (x2) spread daily

September Soy Meal Bean Oil (x2) spread daily

With the ‘add-on’ entries, the position has increased three-fold.  We are now going to risk all three positions to a two-day close above -$3,892 (premium bean oil), which is $2k above the most recent ‘add-on’ entry price.

Eye On the Ball

Our minimum downside target for the September soy meal/bean oil (x2) spread is the contract low of -$14,778, but we could easily see a descent to -$20,000 (premium bean oil) or lower.  Therefore, we will continue our pyramiding strategy to add every $2k down.

‘Add-On’ Trade Strategy:

The blog will sell another September soy meal/bean oil (x2) spread on a close below -$7,892 (premium bean oil).  If filled, exit all four spreads on a two-day close of $2,000 or more above the entry price of the fourth spread.

If the fourth position is entered, sell another September soy meal/bean oil (x2) spread on a close $2,000 below the entry price of the fourth position.  If filled, exit all five spreads on a two-day close of $2,000 or more above the entry price of the fifth spread.

To enter a short position in this spread, sell one 100-ton September soy meal contract and simultaneously buy two 60,000 lb. September bean oil contracts.

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.