Short Arabica Coffee Calendar Spread and Long Soybean Meal Butterfly Spread
SpreadEdge 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.
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 on the Watch List that are planned for client and personal accounts. This article will focus on the short Arabica Coffee calendar spread.
Coffee decisively broke downward resistance in early November, digested the gains throughout the month and then rocketed higher 8.5% last week. Coffee has been in a downtrend since this time last year, and I expect the recent highs to put a cap on the advance in the short term.
The CTA Positioning and 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.
Note that Coffee has a maximum 10 score indicating that CTAs are fully invested and have little trading capital to add to existing longs.
Relative Strength Index
Relative Strength is a momentum oscillator that measures the speed and change of price movements. RSI has a 0 to 100 scale.
Note also that the RSI score for Coffee is 69 after gaining 15 points last week. This is the highest of all agriculture except for Cocoa. Scores approaching 70 have a high likelihood of reversal.
Seasonality data is generated by SeasonAlgo. Entry and exit dates are analyzed and scored for every expiration month combination. Scores are based on a proprietary formula that considers average profit, drawdown and win % over the most recent 15-year period.
Coffee is entering a strong period of bearish seasonality. Trades entered over the next three weeks have hypothetically profited 91% of the time over the past 15 years.
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 Coffee, I will sell the March and July calendar spread. The optimal entry date based on the past 15 years is Tuesday, December 5.
For a video of this trade.
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BTW, for more information on spread charts, my website “SpreadEdgeCapital.com” has a video entitled “Anatomy of a spread trade".
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
SpreadEdge Capital, LLC
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.
On the date of publication, Darren Carlat did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.