A Trade in the Moo Cows

Well if you ever wanted to go against a seasonal trend, here is your chance.

The chart shows the spread between CME Live Cattle and Feeder Cattle futures. Given the different tick value, it’s calculated using the dollar contact size rather than just the spread in prices.

It’s interesting to note the bearish divergence with the MACD, lower trend line break and a rather text book quality head and shoulders all pointing to lower levels.

There is probably a good trade in going short this spread.

As for the seasonal data, the second chart shows the historical pattern played out over 15 years. That red oval shows an optimal period in which to be long the spread. It has in fact been a profitable trade 14 in the last 15 years.

That profitable period is right now. In other words the seasonal data is calling for the spread to move higher from around now until February. As mentioned, the chart shows the seasonal trend measured over 15 years. Interestingly the seasonal data measured over 10 years and 20 years say the same thing. That is, the spread is going up not down.

So what to do? Trade the seasonal data or trade the technicals. Well the lesson here is to do neither. Conflicting signals do not a good trade make.

That’s the thing with spread trading. At times there is some waiting involved. However the idea is to only select trades that tick all the boxes.