MRCI Special Offer: 10 % discount in 12-month subscription. Click here

SCARR VISUAL TRADING: 10 % discount. Coupon code: 912CA5B4AB. Click here

12/30/14

My Headlines of Quarterly Hogs and Pigs Dec. 23, 2014

In my opinion, headlines of Last Quarterly Hogs and Pigs report are these:

1- Litter rate recovers to pre-PED virus numbers:

2- Quarterly Pig crop up 4%, back to standard levels:

3- Hogs and pigs inventory up 2% from December, 1 2013 and 1% from September,1 2014:


4- Sows farrowing  during September-November 2014 up 3%


Conclusions

All data from last USDA report indicate the hog market has recovered its pace after the PED virus crisis. Ped virus caused a big impact on baby pig survival during 2013 and part of 2014. Death loss from PED virus is expected to be lower this winter compared to last winter. The number of hogs to slaughter this summer should be high.

Report can be considered bearish, because key inventory numbers were slightly larger than expected.

12/29/14

Seasonal Futures Spreads, How to Trade them

What is a seasonal futures spread?

First, I will start explaining what a futures spread is. It is as simple as the difference between two futures contracts. We will have to choose a couple of futures contracts highly correlated. In order to be highly correlated, these futures contracts relationship must have an economic sense.

To make a futures spread, we would never select a Japanese Yen futures together with a Coffee future. This spread has not got an economic meaning.

An example of a spread formed with highly correlated futures contracts is this Feeder Cattle calendar spread, GF April-May 2015:


Now, let´s include Seasonality in the futures spreads game. Many of the futures spreads move similarly in different years.

Why? Because every year, similar conditions occur.

Agricultural products events take place in the same months every year. Planting, emerging, heading, maturing and harvesting are events that happen continuosly every year. Futures spreads measure the way these events are behaving the actual year. If we include a comparation with other years´ same spreads, we can analyze the seasonality.

In the next Crude Oil spread chart, seasonality of the last six years is represented as a black line. The actual 2015 spread (blue line) is following the bearish historical seasonality:


Another example about seasonality is consumer habits. Every year, summer barbacues occur. And demand for meat products grows during summer months.

We can also find seasonality in forex futures when foreign companies need to buy or sell a given currency to repatriate their profits during the same months every year.

Energy futures also have strong seasonal behaviors. Gasoline demand is higher during the summer (driving season) while heating oil´s demand is higher during winter.

The following chart shows a Gasoline calendar spread Aug-Sep 2015:




So, how can we trade the different seasonal spreads cited?

I usually search spreads that are behaving this year in the same way that its seasonality. This fact will add success probabilities to our trading. If this year´s conditions are similar to average conditions, spreads should behave the same way.

Before entering into a spread position, I recommend to check price action in the spread´s chart. If the spread´s chart price action is favorable to the seasonal pattern, we will have more chances on our side.

I use basic technical analysis tools: pullbacks in trends, head and shoulders formations, 123 patterns...

Another tip for trading seasonal futures spreads is choosing a spread wich is not very close to the actual moment. I prefer to have more room for the spread to move, in case it does not work at the begining of the trade.

All seasonal charts in this article have been prepared with: Scarr Visual Trading

If you liked this article, you can share it with your friends and followers using the buttons below. Thank you. And feel free to comment anything you want!

12/23/14

Meat Futures Spreads (part two)

In this second article about meat futures, I'll start with general aspects for any spread and I will end up focusing on meat futures.

When seeking a combinations of two futures, I look for the following:

1- Avoid futures that are suffering extreme conditions. We want a combination of future contracts that are moving in a similar way as they did in previous years.

Let´s check it with a easy example. The chart below is Live Cattle spread LE GJ5 (Live Cattle February-April 2015), the blue line represents the current spread with maturities of 2015. The black line is a calculation of seasonal spread (Feb-April) in previous years. The gray lines are standard deviations from the seasonal line.

 live cattle spread seasonal futuros vacas estacional

Before the red arrow, the spread was following its seasonality in a precise way. But something happened in that moment for the relationship between these two future contracts to get out the line of historical behavior.

You can continue trading on the spread (in fact, it has been in my portfolio recently: Spread Live Cattle GJ5), but being aware that this year the reference of previous years does not count.

2- Choose a spread that is not too close in time. It is interesting to have enough time to recover. Only if there is not a "black swan". In that case, we would run the stop loss.

As usually, we will check it better with a graph. In this case, we will focus on energy futures: spread heating oil - gasoline. We have a bearish seasonality in the two charts shown. But, what spread has more recovery time, if the spread separates from seasonality? In January´s spread (missing 1 month) or August´s spread?

spread heating oil gasoline trading gasóleo gasolina

Another reason to be cautious with a spread, when approaching the first maturity, are sudden movements they usually do.

3- Spreads formed with contiguous maturity futures are logically more stable than those that are further apart in time. These spreads are called calendars and are the most common.

4- Evaluate the behavior of the current spread in relation to seasonality. Although I analyze longer periods, the temporary space that I have more in mind is that of the last six years.

And why is that?

I start may seasonal analysis in 2008 because it was the year of the financial earthquake. It marked a line in the sand in the behavior of the various assets. For that reason, I have much more into account the period after 2008.

When we calculate the seasonality with too many years, the seasonal line flattens and standard deviations away. It becomes a little usable information.

If we focus on meat futures, first we must study the months with maturities. Let me show again the picture I posted in the previous article:


There are two months of the year in which we have maturities of Lean Hogs and there are not Live Cattle maturities. These months are May and July. Be especially careful with Lean Hogs´ May maturity, because it has very little volume. If we include this contract into a spread or a butterfly, it will cause strange behavior. The following table shows today´s data on Lean Hogs futures. May´s contract volume is ridiculous.


Another aspect to consider when we discuss spreads, is the volume of each of them. In the following table, you can check spreads (SP) and butterflies (BF) available for Feeder Cattle. Let's focus on spreads (two legs).


Each rectangle has in common the first leg: GF F5 (blue), GF H5 (red), GF J5 (black) .... and so on. Within each box, the first spread has the highest volume, because it has the closest maturity.

I pointed out the spreads that I find most interesting. I discard the maturity of January because there is only one month left. And I keep HJ5 GF GF GF JK5 and KQ5. The rest, which are formed by separate maturities, are highly illiquid.

Finally, I propose a simple exercise. In the next chart, you can check Live Cattle spreads and Butterflies. Can you identify the best spreads to operate? I noted with red boxes the spreads between Live Cattle and Lean Hogs to ignore them.




Click this link to read the first article on meat futures: Meat Futures Spreads (introduction)

I have prepared seasonal charts with: Scarr Visual Trading

Please, feel free to ask anything you need!

If you liked this article, you can share it with your friends and followers using the buttons below. Thank you!

12/22/14

Cattle on Feed Report Dec. 19 2014

Last friday´s Cattle on Feed report noted a 1% increment in total inventory compared with December 1, 2013. For the short term, the inventory chart is slightly bearish:


However, the most surprising data came from placements and marketings:


Placements were the second lowest in November since 1996. With this low placements, cattle prices in spring should be strong

Cattle marketed during November was very low (and prices breaking records). This chart shows the difference among 2013 and 2014.

This is a 35 year chart of Live Cattle. Record prices were reached on November:


This 35 year chart has been prepared with Scarr Visual Trading

12/21/14

Spread Heating Oil - Gasoline

The spread between Heating Oil and Gasoline (with March 2015 contracts) touched its maximum a few days ago and it was removed from the expected seasonality. 

I'll give the futures spread a little longer to see if it returns to the path. Whenever it is not out of range in which it is moving, of course. In this case I will execute the stop.


In this chart, I´m using 5-15-20 year seasonal patterns. Consistency of the bearish seasonal pattern is very high. But energy market is very dangerous nowadays.

Chart is from SeasonAlgo.

You can check the evolution of this futures spread in my Spanish blog: Spread Heating Oil - Gasoline (HO-RB): estacionalidad bajista (6)

12/20/14

Spread BMY-MRK

This spread between US stocks BMY (Bristol-Myers Squibb) and MRK (Merck & Co.) is approaching a very interesting stage.

BMY individual chart shows a greater strength than MRK´s:

On the spread chart, we check that this BMY relative strength has caused the spread to get out of range, and apparently it wants to reach the maximum of a year ago.


You can watch the last post about this spread with stocks, in my Spanish blog: Spread BMY-MRK (3)

This article may interest you: 5 Tips for Choosing a Spread of Stocks

12/19/14

Meat Futures Spreads (introduction)

You're probably asking yourself meat futures? Why? What is so interesting with those futures? The answer is not simple, so I will go slowly. I'm sure that your interest will grow as you progress in your reading. 

 In this first article I'll start explaining some of the characteristics of meat futures that have made me be interested in them. These are the futures on which I base most of my trading: 

 - Cattle Feeder: calves with an average weight of 769 pounds (349 kgs.). The average weight comes from dividing the total weight of the futures contract (50,000 pounds) between the number of animals of the contract (65). Each point is worth $ 500. Symbol: GF 

 - Live Cattle: cattle which have reached slaughter weight. This weight is 1,250 pounds (567 kgs.). The average weight is calculated by dividing the weight of the contract (40,000 pounds) among the 32 cattle contract. Each whole point is $ 400. Symbol: LE. 

 - Lean Hogs: Contracts are 40,000 pounds of pig carcasses. Each whole point is $ 400. Symbol: HE. 

The Feeder Cattle evolve, after several months, in Live Cattle. If we include in the equation the main food is needed for this transformation (corn), we have a nice spread, Cattle Crush. This spread recreates with a synthetic form of futures contracts, the passage of an animal that begins the fattening phase until it reaches its final weight. 

 This graph shows the evolution of Feeder Cattle in the past 35 years, is it interesting?


In the table below, I have marked in yellow the expiration months for each meat futures contract:


Subsequent articles will examine how to take advantage of this peculiar distribution of months available for each type of contract.

These futures are largely unknown by speculators compared to other products. They seem an exotic and difficult to understand product. However, they have several advantages.

First, we must mention as one of its best qualities, seasonality. This seasonality depends on the main livestock feed (corn) and varying times of meat consumption. In Live Cattle, for example, the maximum production coincides with the months of May and June. However, in August and September the number of sacrifices is the lowest.

In the case of Lean Hogs, peak production is in the months of November and December. This is because the price of corn is cheaper at harvest time (October and November). Thus, producers have the cheapest food over the last two to three months of the feeding process, which is when animals consume more. Also keep in mind that in the months of higher temperatures, meat conversion is the lowest.

Seasonality can be affected by adverse weather conditions, diseases, crop conditions ... Sometimes, when everything goes according to established patterns, there can be a major surprise and change the setup in hours or even minutes. If this type of situation is identified, you have to react fast.

It will be better to explain with an example. This is the butterfly chart (combination of three lean hogs futures contracts: may, june and july) Lean Hogs HE KMN4:



It seems that everything is under control, Seasonal bias is clearly bullish. If we are patient and we bought in the minimum area, it seems very easy to make money. However, in the next picture we see what happened next. If someone came up to average down as it was coming to the supports, chances are this trader is not already participating in the market. And there were operators who made a lot.



Another advantage, in my opinion, has to do with the publication of reports of the USDA (United States Department of Agriculture). In the case of cattle, Cattle on Feed report is published on a monthly basis. For pigs, the report is quarterly: Quarterly Hogs and Pigs. These reports are about the census, the number of animals that have entered in feeding farms, heads marketed, etc. In addition, on page USDA there is a an stunning amount of information with high quality.

In my case, I study charts first and then seek explanations on fundamental reasons, to assess the subsequent evolution of the graphics.

My usual operations with these future is the use of spreads (simultaneous purchase and sale of two or more contracts). These spreads are formed with two or three legs (maturity) of the same future.

An example of spread with two legs: Long Short HE HE February and April





An example of butterfly (three legs or maturities): Long HE June, Short HE July (two contracts) and long HE August.



Sometimes I trade the spread between different futures, Live Cattle and Lean Hogs. Since there are two different contracts, this spread can be very volatile.


When I´m trading spreads, I combine technical analysis with the study of that spread´s seasonality in previous years. Seasonality can be analyzed for different periods of time, five years, ten years, fifteen years ... The strength of seasonality of a spread will be greater the longer the period of time in which a behavior has been repeated.

In future posts, I will continue to progress in other related topics about meat futures: method of choice of spreads, butterflies and cattle crush.

This article was originally published in my Spanish blog: Spreads con futuros de carne (introducción)

I have prepared all charts with:Scarr Visual Trading

12/18/14

Spread Feeder Cattle FH5 (3) take profit

This Feeder Cattle spread has been frozen several days (horizontal line) because all maturities ended in limit down. When this situation has been cleared, the closest maturity (January) was much weaker than next maturity (March).

I closed the trade on the proposed take profit.


This is the starting point of the trade (in my Spanish blog): Spread Feeder Cattle FH5

Wheat - Corn Spread

Actual inestability in Russia following the collapse in oil prices and the depreciation of the ruble, have skyrocketed the price of wheat.

My short setup in the wheat-corn spread did not occur. To enter short, I'm waiting for a clearly turnorund figure on the previous resistance.


This is my discarded setup: Situación del spread trigo - maíz (wheat - corn) (2)

12/17/14

Butterfly Lean Hogs MNQ 5

What I like the most this year about this Lean Hogs butterfly is its parsimony. And what I dislike is that I'm out.

The area of 1.5 would be good to go short.


Chart from Scarr Visual Trading

Feeder Cattle Situation

Continuous Feeder Cattle chart shows how the price has reached the first major support after two limit down days:


I have marked on the chart two turnaround figures:

1- 123 pattern confirmed by passing 2.

2- A possible head and shoulders formation.

To draw the two years graph, I have selected a cutoff between the last contracts of 20 days. Thus, we see how the contract within 20 days to reach maturity is overlapped by the next maturity contract.

This type of chart with different colors in maturities is useful to analyze the seasonality of each contract in different years.

After the two limit down days commented, the spread Feeder Cattle FH5 where I'm short has not moved. The explanation of this horizontal movement in the spread is the difference between the two contracts remains the same, having dropped the two maturities the same points (two-day limit down = 6 points).


I have noted with a red arrow, the point of my short entry in the spread and the take profit target area with the red rectangle.

You can keep track of the operation in my Spanish blog: Spread Feeder Cattle FH5 (2)

Both charts were prepared with Scarr Visual Trading


12/16/14

5 Tips for Choosing a Spread of Stocks

Would you like to invest in the stock market and be safe from bearish trends? There are strategies using options, but this time, I'll explain a trading strategy about spreads with stocks.

Let us start with the basics. A spread is formed when buying shares of a company, and simultaneously selling shares of another company. Profit will be generated in the trade in either of these two options:

1- The shares purchased rise more than the shares sold

2- The shares bought fall less than the shares sold

Obviously, there is a loss either opposing possibility occurs.

These simple tips will help you find spreads in shares with the best guarantees of success:

Tip 1: match the nominal bought and sold. That is, the amount for the purchase must equal the amount of the sale. This adjustment will be made to the number of shares of each company that we will buy and sell.

We will check it better with an example. We can create the spread between General Motors and Ford shares. At this time, the value of shares of General Motors (GM) is $ 32.87 and Ford (F) is $ 15.78. If you buy 100 shares of GM and sell 100 shares of F, we would have an unbalanced spread.

In our example, the correct ratio is 1 share of GM for every 2 shares of F. The resulting chart would be this:


Tip 2: select stocks in the same sector and country. We are looking for a pair of actions that move as a well-matched couple dancing. We want your spread or difference fluctuate within a range, with well defined ceilings and floors.

It will be easier to achieve this condition if we choose actions in the same sector and belonging to the same country. Thus, they will move in the same macro stage.

An example of spread that meets this feature is Bristol Myers Squibb Co - Merck & Co. (BMY-MRK).


It is well appreciated how it moves in a defined range. Right now we have to study a short entry in the spread.

Tip 3: the spread has a floor or a ceiling that has worked on several occasions. To illustrate this point I will use the spread SAN - BBVA


To make this spread between the two big Spanish banks BBVA and SAN, I have posted 142 shares and 100 shares SAN BBVA. Thus I reach an equilibrium point or ground near 0. In this spread, it is much more reliable to search a long position near the floor.

Tip 4: check the fundamentals of the two companies. If we want to operate a range situation, we are not interested in any of the stocks is going through a delicate situation. It is needless to perform a complete analysis of the companies´ accounts. It will work a comparative of key data.

I use the basic snapshot of Finviz including the recommendations of analysts and the latest relevant news. If there is something wrong with any of the stocks, we will be able to detect it.




Tip 5: always use stop loss! Spreads formed with stocks have a high probability chance of moving within a range, but the range can quit at any given time and, what is worse, the spread could never come back to the range. The use of stop loss is mandatory in this strategy.


I conclude this mini-guide to choosing spreads shares with a very interesting tool: http://www.aistockcharts.com/stock_analysis.htm.

With this US stock market tool, we can determine what stocks are more correlated with a chosen share. For example, with GM, we get the following chart:


The most correlated stock with GM, in the last 60 days has been Ford.

Once we have pairs of actions with a strong correlation, we can study the graphs of their spreads to select operations.

If you liked this article you can share it with your friends and followers using the buttons below.

My blog in English

I already write a blog about trading futures spreads and forex. But it is written in Spanish, my home language.

As I usually tweet all my blog posts, some English-speaking people told me they´d love to understand better what I was writing. 

So, I decided to start an English written blog. As you you may have noticed, my English should improve a lot. I will try to do my best and if you help me, it would be great.