New Weekly Strategy: Wheat-Corn Price Spread

I am inept at Excel so I had to change the dates into numbers from 1-34 also I wanted to have clear trend lines so had to divide the y-axis into 2 cent intervals but this mangled the readibility =( sorry!

The price spread is a little easier to understand though.

 

By tracking the corn minus wheat spread, the trend seems to be:

• If corn is more expensive than wheat: the spread seems to like to be around the 18-20 cent range, if it narrows the spread seems to bounce back after a day or two.
• If wheat is more expensive than corn: the spread seems to like to be around the 16 cents range. If prices go over this they seem to return to this level after a day or two.

Fundamentals: During Jim’s lecture we learned that corn and wheat can be substituted as food and commercial feed and there would be an optimal price ratio that bounced back and forth in response to shocks. So this week I decided to focus on if this price spread was too narrow, the spread would widen and vice versa.

October 24, 2011

October 23 night time:

I decided to offset my 5 open short soybeans contracts so I could pursue a new strategy this week. Wheat versus corn spread.

(Wheat is always red and corn is blue. Charts created from http://markets.ft.com/research/Markets/Overview?ftcamp=traffic/email/tools/W1//memmkt)

Historical Charting Research – 9 month trend:

1 month trend:

5 day trend:

Strategy: The chart above uses 20 day moving average (orange line), not included but the 10 day moving average is even sharper and both trend lines lay above corn and wheat so I decided to go long on both. But to employ this strategy I had to offset my open 5 short soybean contracts.

Evaluation of strategy: Success, even though outside market played a role in giving commodities a bullish push, the spread widened from 8.6 cents to 14.4 cents.

October 25, 2011

Oct 24 night:

Source http://www.pitnews.com/marketwrapup.htm  (sorry I’m directly quoting but I don’t feel comfortable paraphrasing technical analysis):

Corn Technicals: “Momentum studies are trending higher but have entered overbought levels. The close above the 9-day moving average is a positive short-term indicator for trend. The market has a slightly positive tilt with the close over the swing pivot. The near-term upside objective is at 670. The next area of resistance is around 657 3/4 and 670, while 1st support hits today at 640 3/4 and below there at 636 1/4.”

Wheat Technicals: “Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. A positive signal for trend short-term was given on a close over the 9- bar moving average. With the close higher than the pivot swing number, the market is in a slightly bullish posture. The near-term upside objective is at 656 1/2. The next area of resistance is around 642 1/2 and 656 1/2, while 1st support hits today at 621 1/2 and below there at 614 ¼.”

Soybeans Technicals: “The daily stochastics gave a bearish indicator with a crossover down. Momentum studies trending lower at mid-range should accelerate a move lower if support levels are taken out. The close below the 9-day moving average is a negative short-term indicator for trend. The daily closing price reversal down puts the market on the defensive. The market setup is somewhat negative with the close under the 1st swing support. The next downside target is now at 1187. The next area of resistance is around 1229 and 1254 1/4, while 1st support hits today at 1195 1/2 and below there at 1187.”

 

Strategy: since we’re at resistance levels for wheat with no major news and wheat has closed the gap with corn quite well, I’m going to play it safe and offset my wheat but price at 645. Offset corn at 652. These pricing strategies are a bit risky because normally I use overnight trading but this way I can hopefully offset without a loss and channel my resources into much more lucrative soybeans.

• Beans: since resistance is at 1229 and 1254 and yesterday’s close is at 1226; I will only bid 3 long contracts at 1225.3, just over overnight lows
• I will closely watch how the corn-wheat spread goes tomorrow.

Evaluation of strategy: I managed to offset my corn and wheat and still scrape out a profit thanks to soybeans. The corn-wheat spread expanded to 17.8 cents but I get the feeling my spread strategy will be most effective if the spread is too narrow or too wide, it might not be worth it to use this strategy if the spread is within 5 cents as it will be hard to determine which commodity will go up or down.

 

October 26, 2011

October 25 night:

Fundamental analysis for all three commodities: bearish as US consumer confidence report fell to lowest levels since 2009; upturn in US dollar

Strategy: since corn settled around 650 and wheat at 636 I think wheat will rise so I bid 3 long contracts at 635.1 and try to offset soybeans at 1238.

Evaluation of strategy: failed to enter the market because did not anticipate outside markets plunging prices.

 

October 27, 2011

Since I failed to enter the market yesterday I still held 3 open long contracts of soybeans and wheat each. I figured the market would bounce today as such a dramatic drop in prices should stimulate some buying from foreign countries; and thanks to outside markets it did and I made back all of my losses. Not much strategy to that and a bit of luck.

 

October 28, 2011

October 27 night:

Telvent DTN Daily Market Commentary suggests to watch overnight trading and news on European markets to get an indicator of how Friday’s trading will go. I strongly agree with this advice.

Turning to my RSS Feeds: as of 10:30 pm there was no new news.

Overnight trading: bearish trend for all three commodities.

Source (http://www.pitnews.com/marketwrapup.htm):

Soybeans technicals: “The consolidation has been mostly between support at the 20-day moving average of 1221.5 and resistance at the 10-day moving average of 1241, but the close above that and the high-range close above the pivot point would suggest a retest of the last swing high of 1283.75.”

Wheat technicals: “December wheat was sharply higher, pushing above the downtrend line drawn off the recent highs. Although breaking out to the upside of the wedge (i.e. 641.5), it is still in the range seen for the month of October. The bounce was impressive today, respecting support of an uptrend line drawn off the October lows (618 for tomorrow). The high-range close above the pivot point suggests a bullish bias for Friday. Next resistance is the October high of 665. Directionals have a choppy, slight uptrend, but hold mid-range values that could support a move in either direction. More of an upward correction has been expected, not even retracing 38% to 675 of the big September decline.”

 

Strategy: Tasha’s article from Twitter (@tashalin)  suggested that wheat sales were at almost five month lows. Also the spread between corn and wheat had narrowed to 7.4 cents and it seems more likely that wheat will fall relative to corn. So I decided to offset my 3 open long soybean contracts as well as my wheat 3 open long wheat contracts but go a little further by bidding on a total of 5 short contracts. I am going to take a risk because, as the graph below indicates, both corn and wheat lie above the 20 day moving average and whenever wheat’s gains (in percentage lies almost 2% over corn, the spread narrows within a day or two. Furthermore, if you look at last Friday, when both price’s lines lay above the 20 day moving average and there was a gap in the price spread, the gap narrowed and plunged below the trend line the next day.

 

 

Daily Profit Summary
	Market Open: Open Contracts			New Contracts			Market Close: Open Contracts
Date	C	S	W	C	S	W	C	S	W	Net Profit
Oct-14	0	-1	1	0	1	0	0	0	1	370
Oct-17	0	1	0	0	0	0	0	0	1	850
Oct-18	0	1	0	0	0	0	0	0	1	120
Oct-19	0	1	0	0	1	-1	0	1	0	2380
Oct-20	1	0	0	0	4	0	0	5	0	-330
Oct-21	0	5	0	0	0	0	0	5	0	3200
Oct-24	0	5	0	-2	-5	-4	-2	0	-4	3505
Oct-25	-2	0	-4	2	-3	4	0	-3	0	635
Oct-26	0	-3	-3	0	0	-3	0	-3	0	-7125
Oct-27	0	-3	-3	0	0	0	0	-3	0	7380
Oct-28	0	-3	-3	0	3	5	0	-3	0	1160