Minneapolis/KC Wheat Spread: Trade Parameter Revision

Making a Play For May

The IMC blog has been working an order to short the March Minneapolis/Kansas City wheat spread.  Since the March grain contracts will have their First Notice Day in just another three weeks, however, it may be a prudent time to shift our focus over to the May spread.

may-minneapolis-kansas-city-wheat-spread-daily

May Minneapolis Kansas City wheat spread daily

Over the past year, the May spread has made several pullbacks during the overall run higher.  Each pullback bottomed out above the rising 100-day Moving Average.  Therefore, we are going to keep things simple and use a close below the 100-day MA as a green light to go short.

Trade Strategy:

Cancel the hypothetical order to short the March Minneapolis/Kansas City wheat spread.  Place a new order sell one May Minneapolis wheat contract and simultaneously buy one May Kansas City wheat contract if the spread closes below the rising 100-day MA (currently at +96 1/2 cents).  If filled, risk a two-day close of three cents above the spread contract high that precedes the entry (currently at +$1.25 3/4 cents). 

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Loonie/Kiwi Spread: On the Cusp of a Trend Change

Parameter Revision

The IMC blog is working a hypothetical order to buy the December Canadian dollar/New Zealand dollar spread on a breakout above the August high.  We’re going to update the parameters for this trade, changing both the contracts traded and the entry level.

First of all, we are now going to start tracking and trading the March 2017 contracts.  The December currency contracts will be history in the next week or so.

Secondly, instead of waiting for a breakout above the August high, we are going to go long on a breakout above the declining 100-day Moving Average.  The reason for this is that breakouts above/below the 100-day MA on the nearest-futures chart have been highly accurate in identifying trend changes over the last several years.  More often than not, the move continued in the direction of the breakout for months afterward and the moves were hundreds of basis points in size.  That’s tradable.

canadian-kiwi-spread-daily-100-day-ma

Canadian $ Kiwi $ spread daily (100-day MA)

In addition, the Canadian dollar/New Zealand dollar spread had previously bottomed at 3.87 cents in March 2014, 3.97 cents in March 2015, and 3.84 cents in December 2015.  This created a floor of support around the four-cent mark.

The four-cent support level was breached in September and the spread recovered a month later.

The spread once again sank below four cents in the second half of October.  This time, it accelerated lower and posted a multi-decade low of 1.36 cents on November 8th.

But just two weeks later, the Canadian dollar/New Zealand dollar spread had rocketed back up to the four-cent mark and has been flip-flopping around it since.  The fact that the spread just can’t stay below the four-cent mark indicates that it is undervalued down here.  This is supportive of a long position.  If we can combine that with a sustained close back above the 100-day MA for the first time since early June, it would greatly increase the probabilities that the spread finally makes a sizable run higher.

Trade Strategy:

Cancel the order to buy the December Canadian dollar/New Zealand dollar spread and place a new hypothetical order to buy one March Canadian dollar contract and simultaneously sell one March New Zealand dollar contract if the March spread closes above the 100-day Moving Average (currently around 4.42 cents).  If filled, the spread will initially be liquidated on a two-consecutive day close below the November 29th reaction low of 3.54 cents. 

 

Bund/BOBL spread: Shift to the December Contracts

Buying More Time

The IMC blog is working orders to short the September Bund/BOBL spread.  We’ve been doing this for months, actually.  The spread has continued to climb, so we have just patiently waited for a trend change to materialize before we throw our hat in the ring.

September treasury contracts are expiring soon.  Therefore, we need to recalibrate our short sale parameters and start stalking the December Bund/BOBL spread.

It appears that the December Bund/BOBL spread has found stiff resistance as soon as it crossed the 33.00 level.  This spread peaked at 33.24 on July 5th and backed off.  It then posted a new contract high of 33.41 on July 29th, but quickly retreated again.  Then the spread made it all the way back up to 33.36 just this past Friday.

December Euro Bund Euro BOBL spread daily

December Euro Bund Euro BOBL spread daily

On the one hand, the fact that the spread just can’t get past this barrier makes it tempting to short against.  On the other hand, the more a spread tests support/resistance, the more likely it is to eventually break it.  Therefore, we are inclined to wait for a break of support before we get short.

The December Bund/BOBL spread made its low for the month at 32.51 on August 2nd.  It got awfully close on August 16th when it dropped to 32.55, but the spread recovered again and went on to make new highs for the month.  Therefore, the IMC blog will consider a break of these similar lows a support breach worthy of an entry signal on the short side.

Weekly Confirmation

On the weekly timeframe, we’ve been monitoring the rising 30-bar Moving Average for support.  The spread has closed above the weekly 30-bar MA every week for a year straight now.  A close back below would signal a bearish trend change on this timeframe.

Recall what happened when the Bund/BOBL spread closed below the weekly 30-bar MA and triggered a bearish trend change in 2013 and 2015.  The decline continued for months afterwards.  We want to make sure we are swimming downstream with the tide when that happens again.

Euro Bund Euro BOBL spread weekly

Euro Bund Euro BOBL spread weekly

Coincidentally, the weekly 30-bar MA is currently located at 32.65.  When the December spread becomes the nearest trading month this week, then a break of the current August low will also put the Bund/BOBL spread below the weekly 30-bar MA.  This could create a one-two punch by way of a technical support break on two different timeframes.  It’s hard to get a better setup than that.

Trade Strategy:

Cancel the current hypothetical order to short the September Bund/BOBL spread and replace it with a new hypothetical order to sell one December Euro bund contract and simultaneously buy one December Euro BOBL contract if the spread closes below the current August low of 32.51.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 33.41). 

Bund/BOBL spread: Short Sale Parameter Revision

Trailing Along

For the last several months, the IMC blog has been stalking the Bund/BOBL spread for a short sale.  Basically, we’ve been trailing the spread with a contingency to get short on a break of a prior month’s low.

It hasn’t happened yet.

September Bund BOBL spread daily

September Bund BOBL spread daily

Trading for the month of July ended today.  The September Bund/BOBL spread finished with a new contract high.  A mid-month correction left an obvious price support area on the chart at the July low of 32.54.  Therefore, we are going to raise the short sale parameters to enter on a break of this correction low.

The Bund/BOBL spread is rocketing higher as negative interest rates in Europe continue to propel the treasury spreads.  Once the “rocket” runs out of fuel, though, a significant reversal is likely.

One way we may know that the fuel is gone is when the spread breaks below technical support on at least two timeframes.  The break of the mid-July low would do the trick on the daily timeframe.

On the weekly chart, the rising 30-bar Moving Average may be the trip switch to keep an eye on.  When the Bund/BOBL spread closed below the weekly 30-bar MA in 2013 and again in 2015, it continued to trend lower for months afterwards.

Bund BOBL spread weekly (30-bar MA)

Bund BOBL spread weekly (30-bar MA)

Therefore, a close below the weekly 30-bar MA for the first time since August of 2016 would confirm that a downtrend is in motion.  Once that happens, we will likely be positioned on the short side and looking to add.

Trade Strategy:

Cancel the current hypothetical order to short the Bund/BOBL spread and replace it with a new hypothetical order to sell one September Euro bund contract and simultaneously buy one September Euro BOBL contract if the spread closes below the July low of 32.54.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 34.26). 

Kansas City/Chicago Wheat Spread: Downward Adjustment For the Entry Point

Lower the Bar

The IMC blog has been working a hypothetical order to buy the September Kansas City/Chicago wheat spread on a close above price resistance between the similar May high and February low.  Based on the path that the spread has followed for the last few weeks, we now have a chance to lower the bar and get in at an even better price.

The September spread closed at a new contract low of -25 cents (premium CBOT wheat) on June 13th.  It then powered higher for two days and peaked just below resistance at the declining 30-day Moving Average on June 15th.  Here we are just over a week later and the spread is just a penny shy of the contract low again.

The 30-day MA is currently working as a technical resistance level for the September Kansas City/Chicago wheat spread.  First of all, it stopped the last bear market rally.  Secondly, the spread has closed below the 30-day MA every single day for nearly one-quarter of a year.

September Kansas City Chicago Wheat spread daily

September Kansas City Chicago Wheat spread daily

After establishing the current 2016 high in mid-March, the spread has progressively made a series of lower lows and lower highs.  This is a well-defined downtrend.  Therefore, the most recent bounce high at -15 cents (premium CBOT wheat) is an important line in the sand for this bear market.

Remember, the Kansas City wheat does not normally stay priced at a discount to the Chicago wheat.  So a bullish trend change that puts you long the spread while it’s still inverted is a high-probability trade.  You’d already have an open profit when the spread crosses the ‘even money’ level.  This could provide enough cushion to allow for pyramiding just as the spread is righting itself.  That’s the sort of thing we look for.

Trade Strategy:

Change the hypothetical order to buy one September Kansas City wheat contract and simultaneously sell one September Chicago wheat contract from a close above -3 cents (premium CBOT wheat) to a two-day close above the 30-day MA (currently at -17 cents) or a one-day close above -15 cents (premium CBOT wheat), whichever occurs first.  If filled, risk a two-day close of three cents below the contract low that precedes the entry.

Copper(x2)/Gold Spread: Revise the Revision!

Getting Cute

Currently, the blog is working an order to buy the December copper(x2)/gold spread if it makes a two-day close above the declining 100-day Moving Average.  The spread hasn’t made a two-day close above the declining 100-day MA in nearly a year, so we’re assuming it would signal a bullish trend change. That’s why we’ve been willing to throw our hat in the ring and get long if it happens.

However

We’re going to get cute here and put on a long position right now.

The reasons for buying in right now are two-fold.

December Copper (x2) Gold spread daily (double bottom)

December Copper (x2) Gold spread daily (double bottom)

First, it appears that a double bottom-type pattern may be forming.  The December copper(x2)/gold spread made a contract low at -$24,105 on February 11th and rallied.  It then made a slightly higher low at -$23,645 on May 18th and is starting to rally again.

Copper (x2) Gold spread weekly

Copper (x2) Gold spread weekly

Secondly, this is currently only the third time in nearly half a century when the copper(x2)/gold spread has traded to -$20,000 or lower, basis the nearest-futures weekly chart.  Now, we’re not necessarily going in just because the spread breached the -$20,000 level.  We’re making our move because of how long this spread has been held underwater.

Copper (x2) Gold spread (1980-1981) weekly

Copper (x2) Gold spread (1980-1981) weekly

On the weekly timeframe, the spread first closed below -$20,000 in late June of 1980.  The last time that it closed below -$20,000 during that run was sixteen weeks later in early October.  It didn’t return to the -$20,000 mark again until the great Financial Crisis of ’08.

Copper (x2) Gold spread (2008-2009) weekly

Copper (x2) Gold spread (2008-2009) weekly

During the worst financial period in most of our lifetimes, the copper(x2)/gold spread finally closed back under -$20,000 in the second half of December of 2008.  It then chopped back and forth for a bit as the bottoms for many markets were being established.  The last time that it closed below -$20,000 in this timeframe was nine weeks later in mid-February of 2009.  The spread then staged a two-year bull market as it ripped over $123,000 higher!

Copper (x2) Gold spread (2015-2016) weekly

Copper (x2) Gold spread (2015-2016) weekly

This brings us to the current bear market.  The copper(x2)/gold spread first closed below -$20,000 (on the weekly nearest-futures chart) in the second week of February.  Despite a couple of good rally attempts into late March and late April, the gains didn’t last.  The spread once again closed out the week below -$20,000 just last week.  Now, if you apply a complex mathematical algorithm known as counting, you will discover that this has been a fifteen-week duration that the spread has been down here.  If the nearest-futures spread backs off just $650 by tomorrow’s close, it will match the sixteen week stretch from 1980.  So it seems to me, dear reader, that time may be running out for the bears.

As an added bonus, did you happen to notice that the second weekly low in the 1980 market was slightly lower than the first weekly low

And that the second weekly low in the 2008/2009 market was slightly lower than the first weekly low

And that the second weekly low in the current market is slightly lower than the first weekly low?!

Gee, it’s starting to look like a pattern here.

Then What

Based on the above argument, we’re going to plunge into the copper(x2)/gold spread right here.  But in the event that we get punished for acting on our deep market revelations and get stopped out, the blog will simply return to the original plan of getting long on a two-day close above the declining 100-day MA.

In the event that we do get it right, we’ll be looking to take full advantage of the situation by adding to the position, i.e. pyramiding, as the new bull market unfolds.  Since the 100-day MA is so close by (currently around -$14,580 and dropping), it seems that using a two-day close above it would be too quick for an ‘add-on’ position.  So we’ll watch for a breakout above resistance between the March 28th high of -$9,535 and the April 22nd high of -$9,625 for a green light to add more spreads between the red metal and the yellow metal.

Trade Strategy:

Cancel the hypothetical order to buy the December copper(x2)/gold spread on a two-day close above the 100-day MA.

Place a new order to buy two December copper contracts and simultaneously sell one December gold contract at a spread of -$18,000 or better.  Initially, the spread should be liquidated on a two-consecutive day close below -$25,000.

If stopped out, place a new hypothetical order to buy two December copper contracts and simultaneously sell one December gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract makes a two-day close above the 100-day MA.  Exit this spread on a two-consecutive day close $500 below the contract low that precedes the entry.

 

Copper(x2)/Gold Spread: Reentry Adjustment

To the Point

We posted reentry criteria for a long position in the March-February copper(x2)/gold spread last week. First Notice Day for the gold contract will be here in a couple of weeks, so we’re going to go ahead and buyer longer-dated contracts for both metals.

May-June Copper (x2) Gold spread daily with 100-day MA

May-June Copper (x2) Gold spread daily with 100-day MA

We’re working to buy back in if the May-June copper(x2)/gold spread can make a two-day close above the declining 100-day Moving Average for the first time since the first half of June or if it can clear the late December bounce high.

The Copper/Gold Ratio: It’s Getting Interesting

The ratio between the value of one 25,000 lb. copper contract and one 100 oz. gold contract has dwindled to a nearly seven-year low of 0.45:1. In the event that the ratio matches the financial crisis low of 0.35:1, we may alter the position to buy three copper contracts for every one gold contract sold short. This will help normalize the position since one copper contract would be approximately one-third of the value of one gold contract.

Copper Gold ratio (nearest-futures) weekly

Copper Gold ratio (nearest-futures) weekly

Incidentally, the copper/gold ratio has only been as low as 0.35:1 three times in the last four decades. It turned out to be a phenomenal buying opportunity. Maybe we’ll get lucky and have another chance to get that same bargain price in 2016…

Reentry Strategy:

Cancel the hypothetical order for the March-February copper(x2)/gold spread and place a new order to buy two May copper contracts and simultaneously sell one June gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract makes a two-day close above the 100-day MA or a one-day close above the December 30th rally high of +$1,480. Initially, the spread should be liquidated on a two-consecutive day close $500 below the contract low that precedes the entry.

Cocoa/Sugar Spread: Raise the Short Sale Level

Cocoa/Sugar Spread

The nearest-futures cocoa/sugar (x2) spread posted a new contract high of +$7,791.20 (premium cocoa) on June 15th. This was the highest weekly closing price since September 1986 as the spread made it slightly past the major double top on the weekly timeframe between the 2008 high of +$7,258.80 and the 2002 high of +$7,771.60.

Cocoa Sugar (x2) spread nearest-futures weekly

Cocoa Sugar (x2) spread nearest-futures weekly

Historically, prior instances where the value of one cocoa contract was worth more than the value of the sum of two sugar contracts have been followed by major trend reversals. The smallest decline that followed drove the cocoa/sugar (x2) spread back below -$15k (premium the sum of two sugar contracts). The declines that followed the similar 2002 and 2008 tops ran the spread to -$28,492 and -$45,915, respectively. So we know that the reversal, when it comes, should offer plenty of profit potential for the savvy short seller.

On the daily timeframe, the September-October cocoa/sugar (x2) spread has made a higher monthly high and a higher monthly low for five consecutive months. The spread has held technical support at the rising 30-day Moving Average as well. Since early February, there has only been one instance where the spread closed below the 30-day MA.

September Cocoa October Sugar (x2) spread daily

September Cocoa October Sugar (x2) spread daily

A two-day close below the 30-day MA for the first time since the start of February would signal a bearish trend change for the September-October cocoa/sugar (x2) spread. A break of a prior month’s low would alter the bullish price structure. Either one of these events is good enough for an entry signal on the short side, while the next one to occur will be viewed as the confirmation.

Trade Strategy:

Cancel the current hypothetical order in the September-October cocoa/sugar (x2) spread and replace it with a new order to sell one 10-ton September cocoa contract and simultaneously buy two 112,000 lb. October sugar contracts if the spread makes a two-day close below the 30-day MA (currently around +$4,362) or a one-day close below the June low at +$2,378 (premium the sum of the two sugar contracts), whichever occurs first. Initially, the spread will be liquidated on a two-consecutive day close $500 above the contract high that precedes the entry.

 

RBOB Gasoline/Crude Oil Spread: Revise the Short Sale Parameters

RBOB Gasoline/Crude Oil Spread

The September RBOB gasoline/crude oil spread reached a new one and a half year high of $24.52 this morning, putting it just a buck and a half away from the December 3, 2013 contract high of $25.98. Also, today will mark the fifth-consecutive month that the nearest-futures RBOB gasoline/crude oil ratio finishes above 1.4:1. The prior record was three months. As we’ve noted before, previous excursions above 1.4:1 have always been followed by collapses to 1.15:1 or lower. The fact that the gasoline/crude ratio has been elevated so long could indicate that the inevitable reversal is going to be a doozy. The longer it takes, the bigger the break.

During this multi-month rally from the January low, the September RBOB gasoline/crude oil spread has only broken a previous month’s low once. Therefore, the June 22nd pullback low of $21.43, which set the low for the month, is an important near-term price support level.

September Gasoline Crude Oil spread (75-day MA) daily

September Gasoline Crude Oil spread (75-day MA) daily

Furthermore, the spread has closed above the rising 75-day Moving Average every single day for five months straight. The pullback into the early April low (the only time this year that a prior month’s low was breached) ended just above the 75-day MA. If the September RBOB gasoline/crude oil spread makes a two-day close below the 75-day MA for the first time since late January it would signal a bearish trend change. Coincidentally, the 75-day MA should be at or above the June low within a week. Therefore, a two-day close below the 75-day MA will likely be accompanied by a break below the June low. This ‘tag team’ trend change signal could be the catalyst for a major decline. We’ll take it as a green light to get short.

Trade Strategy:

Cancel the current hypothetical order in the September RBOB gasoline/crude oil spread and replace it with a new order to sell one 42,000 gallon September RBOB gasoline contract and simultaneously buy one 1,000 barrel September crude oil contract if the spread makes a two-day close below the rising 75-day MA (currently around $21.10) or a one-day close below the June low of $21.43, whichever occurs first. If filled, the spread will initially be liquidated on a two-consecutive day close 20 cents above the 2015 high that precedes the entry.

 

Platinum/Gold Spread: Revise Purchase Parameters For July Trading

Platinum/Gold Spread

Another month has rolled by and the platinum/gold spread once again made a lower monthly high and a lower monthly low. At the June 22nd contract low of -$123.20, the spread has spread wiped out three-quarters of the entire run from the 2012 record low to the 2014 double top. Unless a reversal pattern materializes, the spread remains on track for a return to a double bottom at the nearest-futures record lows at the December 7, 2011 low of -$218.90 and the August 10, 2012 low of -$219.80.

The October platinum/gold spread finds important overhead resistance between the declining 75-day Moving Average around -$62.30 and the June high at -$68.20.

Platinum Gold spread nearest-futures daily (75-day MA)

Platinum Gold spread nearest-futures daily (75-day MA)

A two-day close above the declining 75-day MA for the first time since early August and a close above a previous month’s high for the first time since March and only the second time during this bear market would alter the bearish price structure. This would signal a bullish trend change and, quite likely, the end of the bear market. Therefore, we will continue to use this as an entry signal to get long.

Trade Strategy:

Cancel the current hypothetical order in the October platinum/gold spread and replace it with a new order to buy two 50/oz. October platinum futures contracts and simultaneously sell one 100 oz. October gold contract if the spread makes a two-day close above the declining 75-day MA (currently around -$62.30) or a one-day close above the June high of -$68.20 (premium gold), whichever occurs first. If filled, the initial liquidation plan is to exit on a two-consecutive day close $5/oz. below the contract low that precedes the entry.