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Spread Trading: Analysis of GFF18-LEJ18

Spread trading, commodity, cows, livestock, meat

Spread trading, commodity, cows, livestock, meat A spread that seems interesting is offered to us by the SeasonAlgo statistical database, and it is exactly GFF18-LEJ18 with a bearish seasonal window that begins on October 30 and ends on November 12th. The spread is, therefore, to be sold.

If we take the backtest (below) of the last 15 years we see that they have been positive 13 times over 15, and more specifically the last 13 years. However, it is a heavy spread considering the yearly drawdown (last column).

Spread Trading, commodity, meat, feeder cattle, live cattle

 

The price is at high levels as we can see from the monthly chart (below) of the last 15 years. It almost seems to be drawing a Head & Shoulders.

Spread Trading, commodity, meat, feeder cattle, live cattle

 

We have a confirmation if we take the individual years in the same time period. The spread is currently at 2014 levels and is below just 2015 and 2016 (chart below).

Spread Trading, commodity, meat, feeder cattle, live cattle

 

In addition, there is a correlation of at least 80% with two years of the past: 2008 and 2015 (chart below). Important but not essential aspect, however, which strengthens the "statistical signal”.

Spread Trading, commodity, meat, feeder cattle, live cattle

 

We now come to the spread chart that has a bearish divergence as you can see from the figure below.

Spread Trading, commodity, meat, feeder cattle, live cattle

 

It would really look like a good spread with which to trade. However, there is one aspect that we have not yet seen and that holds, at least for the moment, a short entry.

Spread Trading, commodity, meat, feeder cattle, live cattle

 

Let's see the charts of the two individual futures that make up the spread, GFF18 (above) and LEJ18 (below).

Spread Trading, commodity, meat, feeder cattle, live cattle

 

As said, seasonality is bearish and selling the GFF18-LEJ18 spread, we sell the Future on the Feeder Cattle delivery January 2018 and we buy the future on Live Cattle delivery April 2018. The two charts are very similar but with an important difference. While the future on Live Cattle (the one on sale) is just above a support, the future of Live Cattle (the one in the purchase) is immediately under a resistance.

Under these conditions, it is obvious that it is not advisable to sell the spread now, but it is better to wait that the Feeder Cattle future falls under the support.

With this example/analysis, I wanted to show you that you always have to look at each aspect well when you are analysing a spread (but not only), and only if all the parameters are on our side, then we can do that operation. We must always put ourselves on the side of probabilities.

 
Seasonalgo, seasonal trading, spread trading, commodity market

 

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