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 3 trades planned for clients and personal accounts.  This article will focus on the Cocoa 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

Last week I commented “Cocoa broke through the declining trendline in mid-November and has gained nearly 48% over this time.  Cocoa is approaching overhead resistance that will likely curtail this advance.  The trade I am considering is scheduled for Friday so there will be 4 trading days to determine if this resistance level will hold.” 

Cocoa indeed broke through overhead resistance and moved aggressively higher.  In total, Cocoa gained 14.5% by weeks end.  Once again, I will be looking for weakness next week before entering a similar trade that I passed on last week.

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.

Last week I noted Cocoa had a maximum score of 10, indicating that CTAs were fully invested and had little trading capital to add to existing longs.  I also noted that the RSI score was 74 and well above the 70 level that is considered reversal territory.  This week the momentum score remains at the maximum “10” and the relative strength increased to 81.  RSI scores rarely reaches the 80’s so a reversal is even more likely next week.

Index Rebalancing

The BCOM and GSCI Indexes will be rebalancing their funds beginning on January 8th. During this window, index funds managing ~$170B will buy and sell commodity futures to rebalance and reweight their holdings.  The rebalancing estimates currently predict big buying in Cotton, Feeder Cattle, and Kansas Wheat, and big selling in Arabica Coffee, Cocoa, Silver, and Zinc.  

This video from Peak Trading Research explains in more detail.  This event along with the overbought levels previously noted should put significant pressure on Cocoa prices through the middle of January.

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 Cocoa, I will sell the March, May calendar spread.  The optimal entry date is Saturday December 21 that I will roll forward to Friday December 20th, 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.