Spread Edge 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 2 trades on the Watch List planned for client and personal accounts.  This article will focus on the Lean Hogs calendar spread.

Disclaimer

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

Lean Hogs have been grinding higher since mid-August, recently corrected, and have now broken through the top of the pennant.

However, there is additional overhead resistance to fight through.  Given the overbought conditions to be reviewed, Lean Hogs will likely struggle to get through the next level.

Other Indicators

There are several indicators that show extreme levels for Lean Hogs. 

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. 

Lean Hogs continues to be amongst the most “Overbought and Expensive” markets in the Ag complex. Markets can stay elevated in relative price and position for extended periods, however, the other indicators presented points to Lean Hogs returning to more normal levels.

Commitment of Traders

Commitment of Traders data (commonly referred to as COT) is generated by Peak Trading Research using data published every week by the CFTC.  Hedge funds are price drivers in the agriculture markets.  Peak uses machine learning algorithms to provide daily fund position estimates and context around how extended long (red) or extended short (green) the funds are on the date listed.

Lean Hogs has a maximum 100 “Net Position Percentile” for both Non-Commercial and Managed Money Hedge Funds.  In addition, the long to short ratio is 5.5x for Non-Commercial and 15.3x for Managed Money. Both ratios are the highest within the agriculture complex.

Hedge Fund Position Estimates

Managed money hedge funds are consistently drivers of futures price changes.  When hedge funds buy futures prices tend to increase and vice versa.

Lean Hogs is currently at its highest hedge funds positions over the past 52 weeks. 

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 Lean Hogs, I will sell the June, July calendar spread.  The optimal entry date is Thursday December 26 based on the past 15 years of historical data.

More Information

Use coupon code “SpreadEdge” and get the Weekly Newsletter and Daily Alerts for $1 for the first month.  For a limited time, you can receive my Futures Training Videos for free with a 3-month, 6-month, or 12-month subscription.

For a FREE eBook about the SpreadEdge seasonal spread strategy.

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.