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 planned for clients and personal accounts. This article will focus on the Soybean Meal 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
December Soybean Meal has decreased by over 17% since early October. The current leg down has a 52-day duration which is similar to the 48 days drop between late May and mid-July. Based on the extremes reviewed in the next sections, Soybean Meal is ready for a bounce higher over the near term.
Hedge Fund Position Estimates
The Commitment of Traders (COT) report, issued by the Commodity Futures Trading Commission (CFTC), offers a weekly snapshot of the positions taken by different market participants in the U.S. futures markets. Published every Friday at 3:30 PM Eastern Time, the COT report reflects positions held as of the previous Tuesday’s closing business hours. Peak Trading Research assesses the latest COT report, examining alterations in price and open interest to provide an appraisal of net fund positioning daily.
Soybean Meal is near its lowest hedge fund position over the past 52 weeks.
% Carry Yield
Futures calendar curves vary in shape over time. Some often invert, with front-month contract prices exceeding those of later contracts, resulting in positive carry. Conversely, some curves exhibit contango, leading to a negative carry. % Carry yield is the one-year calendar curve yield as a percentage of contract notional value. Markets tend to reverse when they get at or near their highest or lowest levels over the past 52 weeks.
Soybean Meal is also at its lowest carry yield over the past 52 weeks.
CTA Momentum and Relative Strength
The CTA 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.
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100. Scores above 70 or below 30 are prime for reversal.
Soybean Meal has a minimum (10) score indicating that CTAs are minimally invested and have plenty of trading capital to cover shorts or add new longs. Note also that the RSI score is 29 and in reversal territory.
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 Soybean Meal, I will buy the July, August calendar spread. The optimal entry date is Tuesday 11/26 based on the past 15 years of historical data.
