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Spread Scan Issue: February 28, 2007 - Volume 133

Today we consider an inter-market meats spread: long May 07 Feeder Cattle and short June 07 Live Cattle (500*FCK7 – 400*LCM7). This spread normally reaches its low in March before it starts the seasonal up move thru April and May. Will seasonality help to move the spread above the double top of February, and will this be the start of its seasonal up move?

Traders may want to enter the spread at a value of $14,600. Margin for the spread is $2,633 (no reduced margin). Suggested risk is $1,200. Initial projected objective is $1,200, then a move to $20,000 or higher. Basis is seasonal.

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Previous Trades:

Andy Jordan's Trading Bites

Student's Question: "Andy, should I be looking at fundamentals?"

Andy: There are a number of reasons that cause many traders to favor technical analysis over fundamentals. For starters, fundamental traders tend to be commercial firms; that is, they are involved in the actual production or consumption of a commodity. Because of this, they have intimate, day-to-day knowledge of supply and demand. The commercial firms have information that most of us cannot afford to acquire. For example, are you able to check global soil conditions in an agricultural commodity you wish to trade? Can you check crop conditions? Commercial firms can and do check such things. They also check long-range weather forecasts, crop yield forecasts, and existing inventories.

Commercials have the best fundamental information on a market. You and I have a harder time getting pertinent fundamental information, especially in markets that are more thinly traded. Fundamental analysis generally requires a longer term trading horizon. Fundamentals tend to change more slowly than do technical conditions.

Technical traders tend to be almost everyone except the commercials, such as commodity pools, funds, and retail speculators. Speculators tend to trade in shorter time frames, and technical analysis may better serve shorter term traders. It's unlikely that fundamental analysis will tell you where beans may be next week, but technical analysis may do so.

The widespread use of technical analysis raises an interesting question - does technical analysis work because it actually helps interpret the markets, or does it work because it is widely followed, and thus creates self-fulfilling prophecies for the markets? Whichever it is, I don't care, as long as it works!

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