Copper(x2)/Gold Spread: Long-Awaited Birth of the Bull?

The Real McCoy?

Just before Memorial Day, the IMC blog bought a December copper(x2)/gold spread.  The position was liquidated with a loss a few weeks later when the spread hit new lows for the move.

Glad we got out.  The spread proceeded to head south.  Just a month after our exit, the nearest-futures copper(x2)/gold spread breached major support at the 2009 all-time low of -$29,380 (premium gold).

However, there was no dramatic waterfall decline triggered by the support break.  The spread bottomed at -$30,085 on July 7th and the reversed higher.  The bottom was established less than $1,000 below the 2009 Financial Crisis low.

However, the July low was finally broken right after Labor Day.  That’s when the copper(x2)/gold spread crashed to…-$30,840.  Huh.  Not very dramatic, was it?  The September low was set in place only $755 below the July low.

copper-x2-gold-spread-daily-nearest-futures-for-10-yrs

Copper (x2) Gold spread daily (nearest-futures for 10 yrs).jpg

The fact that the spread cracked the Financial Crisis low by a slim margin –twice!– and then quickly turned around indicates that this bear market is scraping the bottom of the barrel.  As a matter of fact, it is a major buy signal.  Readers of this blog may be familiar with what we call this pattern: The Wash & Rinse.  It’s a failed breakout signal that often leads to a major move in the opposite of the initial breakout.  Looks to me like that’s what happened.

Bullish Trend Change

Back in June, the blog set trade parameters in place to take another crack at the long side of the December copper(x2)/gold spread.  Our trigger point was to get in if/when the spread could make a two-day close above resistance at the declining 100-day Moving Average.

Prior rallies had ended either side of the 100-day MA, so a sustained close above the 100-day MA would be our indicator that the switch had been flipped.

december-copper-x2-gold-spread-daily-100-day

December Copper (x2) Gold spread daily (100-day MA)

Last week, the trend change finally happened.  The spread made a two-day close above the 100-day MA for the first time in over fifteen months.  The fact that it occurred after a Wash & Rinse off of historic lows endorses the idea that a major bottom is in place.

Therefore, the IMC blog entered a long position in the December copper(x2)/gold spread at -$23,100 on September 29th.

Like we said a few months before, we believe that a bullish trend change signal could position us in the buying opportunity of a lifetime before it makes any fundamental sense.  Last week’s action may have just done that.

More Confirmation

Commodity markets are mean-reverting, so trends that reach historic extremes are often followed by sizable trends in the opposite direction.

Not only did the copper(x2)/gold spread reach an all-time low last month, but the ratio between the value of one 25,000 lb. copper contract and one 100 oz. gold contract also bottomed at a multi-year low of 0.386:1.  This was just a stone’s throw from the Financial Crisis low of 0.35:1.

Keep in mind that the copper/gold ratio has only been at 0.35:1 or lower on three occasions in the last four decades.  So this was a rare event to get in the same vicinity.  The fact that the copper/gold ratio also surpassed the 100-day MA for the first time in over fifteen months was more confirmation of a trend change off of historic lows.

copper-x2-gold-spread-weekly-underwater-line

Copper (x2) Gold spread weekly (underwater line)

In addition, the copper(x2)/gold spread is still inverted!  It has been underwater for over nine consecutive months now.  This is the longest inversion since the mid-1980s.

So despite the recent trend change and the run to a three-month high, the copper(x2)/gold spread is still historically underwater.  This leaves a lot of profit potential ahead of us.  You can bet that we will be watching vigilantly for opportunities to add to our long position as the trend unfolds.

ULSD/Crude Spread: The Next Leg Down

About to Tank

On July 29th the December ULSD/crude spread closed below the 100-day Moving Average for the first time since early May.  This triggered and entry signal for the blog, so a hypothetical short position was entered at $13.84 (premium ULSD).  Initially, we are risking to a two-consecutive day close above $15.94.

December ULSD Crude Oil spread daily (200-day MA)Recall that this is happening after the spread briefly pushed above the 200-day Moving Average and rolled over.  When this happened last year, the spread continued to decline for several months and dropped over fifteen dollars per spread.  Just in case this is a replay of2015, we will be watching for setups to pyramid the position.

Loon/Kiwi Spread: A Long Position Was Initiated

Buying the Bottom…Hopefully

Today the IMC blog initiated a long position in the Canadian dollar/New Zealand dollar spread at 4.75 cents (premium Canada).  Initially, the position will be liquidated on a two-consecutive day close below 3.75 cents.

Canadian $ Kiwi $ spread daily

Canadian $ Kiwi $ spread daily

We are now monitoring on the 75-day Moving Average.  The last few closes above the 75-day MA have been followed by further gains of several hundred more basis points in this spread.  Therefore, a close back above the 75-day MA for the first time since the end of May would be a green light to add more.

However, instead of setting parameters to automatically add on the close above the 75-day MA, we will assess the situation after it occurs.  We will need to see how far above the 75-day MA the Canadian dollar/New Zealand dollar spread closes, whether or not it experiences a pullback, and what size of countertrend moves the spread makes in order to get a feel for the volatility.  That way, we will be able to make a better-informed decision on entry and initial exit levels.  This will also give us a better feel for the reward-to-risk potential on the trade.

Gold/Crude Spread: Start of a New Bear Leg…Maybe

Back In the Ring

The IMC blog reentered a hypothetical short position in the December gold/crude (x3) spread at -$14,430 (premium crude) on July 13th.  Initially, the exit strategy is to liquidate the spread on a two-day close above -$5,480 (premium crude), which is $500 above the three-month high that was posted on July 7th.

The spread was reentered when it closed back below the 100-day Moving Average.  This may have signaled that the recent run was a bear market rally and that it has reached its conclusion.

December Gold Crude Oil (x3) spread daily

December Gold Crude Oil (x3) spread daily

If we got it right, then a new leg lower should be forthcoming.  A break below the June 8th low of -$32,950 would confirm it.  If that happens, we will be looking for a place to add to the short position.  After all, our minimum downside target for the gold/crude (x3) is -$78,000 and we could even see it head for -$148,000 (premium crude).  This could prove to be a lucrative opportunity.

Gasoline/Crude Oil Spread: A Stop In the Drop

Out With a Profit

On January 15th, the IMC blog entered a hypothetical short position in the RBOB gasoline/crude oil spread.  After some rollovers, we ended up in the August spread at the equivalent of $21.19 (premium gasoline).

August RBOB Gasoline Crude Oil spread daily

August RBOB Gasoline Crude Oil spread daily

On July 11th the position was liquidated at $13.34.  This was done because the spread had undercut price support between the January 13, 2015 low of $13.24 and the February 9, 2016 low of $13.20 and then reversed higher, triggering a Wash & Rinse buy signal.

The trade resulted in a profit of +$7,850 per spread.  We will now sit on the sidelines and wait until a new setup materializes.

Soy Meal/Bean Oil Spread: Bearish Trend Change Signaled

The ‘Has-Bean’ Bull Run?

The IMC blog entered a short position in the September soy meal/bean oil (x2) spread yesterday at +$500 (premium meal) when it sold one soy meal contract at $363.80 (a value of $36,380) and bought two bean oil contracts at 29.90 (total contract value of $35,880).  The position is initially being risked to a two-day close above +$3,000 (premium meal).

The short sale was initialed because the spread closed below the rising 30-day Moving Average for the first time in nearly three months and signaled a trend change.  This occurred just a week after the spread had closed at +$3,244 (premium meal) on the weekly nearest-futures chart …a price that has only been surpassed two times in the last forty-five years.

September Soy Meal Bean Oil (x2) spread daily

September Soy Meal Bean Oil (x2) spread daily

An end-of-week close below the mid-June pullback low of -$148 (premium bean oil) would alter the multi-month pattern of higher highs and higher lows.  This would increase the odds that the bull run is over.

Historically, prior bull markets that took the soy meal/bean oil (x2) spread up to where the soy meal had the premium were followed by declines that put the bean oil premium at $10,000 or more.  In most cases, the spread even dropped to -$20,000 (premium bean oil) or lower.  So getting short while the meal still has the premium is an ideal position to be in.  If the top is in, the spread has thousands of dollars –maybe even tens of thousands of dollars– of downside ahead of it.  You can bet that we’ll be looking for opportunities to pyramid the short position as the meal products get crushed.

Kansas City/Chicago Wheat Spread: Return of the Bull

Trend Change

For the first time in over three months, the September Kansas City/Chicago wheat spread made a two-day close above the declining 30-day Moving Average.  This triggered the blog’s buy signal.  In addition, the spread cleared near-term price resistance at the mid-June bounce high.  This altered the previously bearish pattern of lower lows and lower bounce highs.  It appears that the bottom is finally in.

September Kansas City Chicago Wheat spread daily

September Kansas City Chicago Wheat spread daily

The IMC blog initiated a hypothetical long position in the September Kansas City/Chicago wheat spread at yesterday’s closing price of -13 3/4 cents (premium CBOT wheat).  Initially, it is being risked to a two-day close below -32 cents (premium CBOT wheat).

If this really is the trend change we were hoping for, we would like to increase the position size.  However, we will wait for the spread to confirm our opinion.  To do so, it would provide buy setups at higher levels than where we just entered.  This is because it will take a pattern of higher highs and higher lows to define the spread as being in a new uptrend.  So be patient and wait for confirmation before pyramiding your position.

Meal/Bean Spread: Is the Blast Over? Sure Looks Like It

What Goes Up…

Must come down!  Eventually.  Based on yesterday’s close, now might be the time for the Dec-Nov soy meal (x2)/soybean spread to do so.

This spread closed below the rising 30-day Moving Average yesterday for the first time since early April.  This triggered the blog’s short sale signal.

Dec-Nov Soy Meal Soybean (x2) spread daily

Dec-Nov Soy Meal Soybean (x2) spread daily

The IMC blog entered a hypothetical short position when it sold two 100-ton December soy meal contracts at $381.00 (total value of $76,200) and bought one 5,000 bushel November soybean contract at $11.01 1/2 (contract value of $55,075).  This puts us short at +$21,125 (premium meal).  We will initially risk the trade to a two-consecutive day close above +$24,250 (premium beans).

If/when the spread gives us some setups for pyramiding, we will be sure to address it.  But if you have your own methodologies for doing so, don’t wait around for us!  Take advantage of it.  This could be just the start of a beautiful bear market.

Soybean/Cotton Spread: Bearish Trend Change Triggered!

The Great Unraveling…Hopefully

Yesterday the Nov-Dec bean/cotton spread closed below the rising 30-day Moving Average for the first time since the first week of 2016.  This signaled a bearish trend change and elected the blog’s criteria for a hypothetical short sale.

The November soybean contract was sold short at $11.01 1/4 (contract value of $55,075) and the December cotton contract was purchased at 65.42 (contract value of $32,710).  This puts us in the spread at +$22,365 (premium beans).  Initially, we are risking a two-consecutive day close above +$26,400 (premium beans).

Nov-Dec 2016 soybean cotton spread daily

Nov-Dec 2016 soybean cotton spread daily

Recall from the previous post that prior excursions to +$20,000 (premium beans) or higher have been followed by bear markets that took the spread down to at least even money.  Therefore, we anticipate that we’ll see some pyramiding opportunities to take full advantage of the decline.  Once we have a big enough open profit on this trade we will examine the market volatility and price patterns to determine the best course of action for ‘add-on’ trades.

US Treasuries: One Out and One Down

Knocked Out

The IMC blog initiated short positions in the US yield curve at the beginning of March.  Thanks to the weaker-than-expected jobs report last week, one of the liquidation parameters were elected.

A short September T-bond/T-note spread was entered at the equivalent 31-14 on March 1st and liquidated at 35-20 on June 3rd.  This resulted in a loss of -$4,187.50 per spread.

Also, a short September T-note/5-Year note spread was entered at the equivalent 9-12.5 on March 1st.  The exit criterion is to bail on a two-consecutive day close above 10-06.  This hasn’t happened yet, but it’s gotten awfully close.  The spread hit 10-05 just last week!

Stretched Thin

Despite the fact that the T-bond/T-note spread was liquidated, it remains on our radar screen for another potential short sale.  The September spread posted a new contract high and is now just a tick away from the 36-00 mark.  This puts it right on the doorstep of the 2015 top at 36-14 and the February 2016 peak at 36-10.

T-bond T-note spread daily (nearest-futures)

T-bond T-note spread daily (nearest-futures)

However, the nearest-futures spread hit a new high of 37-12 today.  This is a bullish event for the spread.  Because of this potential breakout, we’re going to hang back a bit and see if the breakout is sustainable or not before we post any reentry parameters.  A two-day close back under the February high of 35-11 in the September spread could do the trick.  If something interesting develops, we’ll certainly have more to say.