SpreadEdge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates.  SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.

Watch List
The SpreadEdge Newsletter includes a “Watch List” of trades that meet our strict screening criteria.  Included in the Watch List are the markets, commodity symbols, entry and exit dates, win %, average profit, average drawdown, best profit, worst loss, and risk level (using a 1-5 scale).  All information is hypothetical and is based on the most recent 15 years of historical data.

This week there are 3 trades on the Watch List that are planned for client and personal accounts.  This video will focus on the short Feeder Cattle calendar spread.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.  ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
 

Technical Analysis

Feeder Cattle has gained 16.5% since early December including an almost 4 point move on Friday 2/16.  FC is now running into 2 layers of overhead resistance and will likely stall in the short term.

Seasonality
Seasonality data is generated by SeasonAlgo.  Entry and exit dates are analyzed and scored for every expiration month combination.  Scores are based on a proprietary formula that considers average profit, drawdown and win % over the most recent 15-year period.  Normalized seasonality provided by Peak Research confirms this strong seasonal period.

 

Feeder Cattle is entering a period of strong “bearish” seasonality.  This bearish seasonality will continue for at least the next 4 weeks.

Relative Price and Positioning
Relative Positioning – Oversold versus Overbought on the horizontal axis.  COT current net position compared to the COT data over the past 24 months.
Relative Price - Cheap versus Expensive on the vertical axis.  A comparison of the front month current price compared to the front month price over the past 24 months.  

Feeder Cattle continues to be amongst the most “Expensive and Overbought” markets in the Ag complex.  Markets can stay elevated in relative price and position for extended periods, however, Feeder Cattle has already begun to move down and left to more normal levels.

CTA Positioning and Momentum
The CTA Positioning and Momentum Score is an accurate measure of current momentum and trend-following trader positioning using a (+10 / -10 scale).  Momentum and trend following traders represent a large percentage of trading and can move markets significantly higher or lower. 

Feeder Cattle dropped (3) points last week from the maximum 10 to 7.

Relative Strength
Relative Strength is a momentum oscillator that measures the speed and change of price movements.  RSI has a 0 to 100 scale.

Feeder Cattle also dropped 5 RSI points this past week from 72 to 67.  Above 70 is generally considered reversal territory so the slide in FC has already begun.
 

Spread Chart
Spread Charts represent the difference between the front and back month contracts and are simply the front month price minus the back month price.  Spreads that are sold profit when the price gets more negative or less positive.  Spreads that are bought profit when prices get more positive or less negative.

To trade this, I will sell the May, September calendar spread.  The optimal entry date is February 19 which will slide to Tuesday, February 20 given the Presidents Day holiday.

Videos

For a video of this trade.

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BTW, for more information on spread charts, my website “SpreadEdgeCapital.com” has a video entitled “Anatomy of a spread trade".

More Information

The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets.  In addition, spread trade recommendations and follow-up on open trades is also provided.  For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com

Darren Carlat

SpreadEdge Capital, LLC

(214) 636-3133

Darren@SpreadEdgeCapital.com

www.SpreadEdgeCapital.com

Disclaimer

SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.