The purpose of this report is to discuss historical and current price relationships between related markets with the goal of identifying high probability, high risk/reward set ups for spread trades. The focus will be on the "convergence" trades. In particular, we are targeting spreads that are at historic extremes and looking to enter only after a potential trend change takes place. A "spread trade" consists of being long in a market(s) and simultaneously being short in another related market(s). The objective is to profit from the change in the price difference (spread) between the markets. Most of the time inter-market spreads (spreads between different markets) will be discussed, sometimes intra-market spreads (spreads between different delivery contracts of the same underlying market) will be looked at, once in a while we throw in an inter-exchange spread (spreads between markets traded on different exchanges), and when we are feeling exceptionally smart, we will include ratio spreads, too. We are also introducing a new concept called a "combo position" which is the sum of the price of two or more markets. While a "combo position" is not a spread position, we have included it because it still demonstrates the relationships between two or more related markets. There are times when it seems that technical analysis applied to an individual market is not easily discerned. The result is that the analyst/trader is unable to get a clear enough picture to form a trading strategy for that particular market.

However, there are also times when that same market is analyzed in relation to another market and a much more obvious outlook begins to emerge. This can create new possibilities and trading ideas for the analyst/trader. This is what we have endeavored to do with the Spread Watch. Enjoy!

Interest Rates

Treasury bonds vs. Ten-year notes (NOB spread) - The September NOB spread (T-bonds - T-notes) plunged to a low of 1-05 in June. This is just over a quarter of a point from last year's weekly low of 27/32nds. A break below last year's low could invert the spread and take it down to the major weekly Fibonacci .618 retracement at 1-15.5 premium T-notes (as measured between the 2003 weekly low of 5-20 and last year's weekly high of 5-07). Technical resistance is at the current major daily Fibonacci .382 retracement at 2-20.5 (as measured between the contract high of 5-01 and the current contract low of 1-05). Further resistance is at the current major daily Fibonacci .618 retracement at 3-18 (as measured between the contract high of 5-01 and the current contract low of 1-05) in confluence with the daily May high of 3-20. If the NOB spread can get past this level it could push it's way back up to major technical resistance just above the five point level:

The daily contract spread high was 5-01 in December, the 2006 weekly closing high was 5-07, the weekly January 2006 high and the weekly February 2006 high were both at 5-01, the 2005 weekly closing high was 5-03, the 2006 monthly closing high was 5-08, and the 2005 monthly closing high was 5-14.

Obviously, this is an important wall of price resistance and an ideal spot to look for an entry on the short side of this spread. It will probably take renewed weakness in the US economy, a severe hit in the stock market, and/or a significant decline in commodity prices to flatten the US yield curve and run these US interest rate spreads back up to historic extremes again. Bottom line: Look for an opportunity to short this spread only if it trades back up near the 5-00 mark. Current Trade Strategy: Stand aside.

Ten-year notes vs. Five-year notes - The September 10-year notes/5-year notes spread hit a spread of 1-00 (premium T-notes) in June and made a potential double bottom on the weekly continuous chart. If it continues it's descent it may hit a monthly up trend line around 17/32nds (as drawn across the 1994 low of 3-31 premium 5-year notes and the 2000 low of 2-04.5 premium 5-year notes). Conversely, if the double bottom holds the spread could rally back up into important weekly resistance located between this year's current weekly high of 2-28.5, the November weekly high of 3-03, and the January 2006 weekly high of 3-05. A breakout above these highs could flatten the yield curve and send the spread up to the psychological 4-00 area. Bottom line: Watch to see if a trade set-up materializes near 3-00.

Current Trade Strategy: Stand aside.

Treasury bonds vs. Five-year notes - The September T-bonds/5-year notes spread finds important technical support between the June low of 2-05 (premium T-bonds) on the daily chart and last year's weekly low of 1-31. A break below this support zone could quickly invert the spread. Technical resistance is at the current major daily Fibonacci .382 retracement at 4-13 (as measured between the contract high of 8-00 and the daily June low of

2-05) followed by the daily June high of 4-23 (premium T-bonds). Further resistance is located between the current major daily Fibonacci .618 retracement at 5-25 (as measured between the contract high of 8-00 and the daily June low of 2-05) and the daily May high of 6-04 (premium T-bonds).

If the T-bonds/5-year notes spread can make it thru these resistance levels it could hit bigger technical resistance clustered between the daily contract high of 8-00, the weekly November high of 8-10, and the January 2006 weekly high of 8-02. A strong breakout above this price barrier could allow the spread to catapult to the 2005 all-time high of 9-28. Bottom line: Watch to see if a set-up to get short materializes at much higher levels. Current Trade Strategy: Stand aside.

Euro bunds (10 yr.) vs. Euro BOBL (5 yr.) - The September bunds/BOBL spread plunged to a multi-year low of 4.22 (premium Euro bunds). Therefore, it's now a long ways away from the historic extremes that we like to see before entering a trade. We won't spend much time analyzing it at the moment, but if the yield curve on European treasuries flattens and drives this spread back up near 8.00 (premium Euro bunds) we will become very interested again.

Historically, the spread doesn't stay above 8.00 for very long. Bottom line: Watch to see if a trade set-up materializes to get short if the spread ever nears 8.00 again. Current Trade Strategy: Stand Aside.

Eurodollars (calendar spread) - The December '08 Eurodollar/December '07 Eurodollar spread plunged from a new high in early May to a multi-month low in early June. Significantly diminished hopes of near-term cut in US interest rates was the culprit behind this decline. The spread has since stabilized and bounced into resistance at the major daily Fibonacci .382 retracement. If the spread continues it's recovery it could test the current major daily Fibonacci .618 retracement at 29.5 (premium to the '08 contract). If it reaches this level it would indicate that the December '08 Eurodollar has an additional quarter-point rate cut priced in. (Remember that the price on a Eurodollar is inverse to the US interest rate so when the Eurodollar price goes up, the interest rate goes down). After that, resistance is at the current spread high of 39 basis points (premium to the '08 contract). A rally in the spread shows a flattening of the yield curve. Therefore, if the spread does rally back to where the December '08 Eurodollar has a premium of at least 25 basis points over the December '07 Eurodollar we will be looking to get short on a reversal signal. 

Bottom line: Look for a set-up to get short only after the spread rallies to 20 basis points (premium to the '08 contract) or higher. 

Current Trade Strategy: Stand aside.

Currencies

Canadian dollar vs. Australian dollar - The September Canadian dollar/Australian dollar spread finds important technical resistance clustered between the weekly July 2006 reaction low of .1182 (old support), the daily May high of .1183 (premium Canadian dollar), and the current major weekly Fibonacci .618 retracement at .1186 (as measured between last year's all-time high of .1612 on the weekly chart and this year's current weekly low of .0497). Historically, this spread should be monitored for a set-up on the short side once it trades at twelve cents or higher (premium Canadian dollar). A close over twelve cents could send the spread up to the current major weekly Fibonacci .786 retracement at .1373 (as measured between last year's all-time high of .1612 on the weekly chart and this year's current weekly low of .0497). If the rally does not end here the spread may run all the way up to the current all-time high just above sixteen cents. Near term support is at the current daily Fibonacci .618 retracement at .0780 (premium Canadian dollar). Further support is at located between this year's current weekly low of .0497 and the major weekly Fibonacci .618 retracement at .0454 (premium Canadian dollar). A break below this support area could send the spread all the way down to the weekly 2005 low of .0162. 

Bottom line: Monitor for a set-up to get short if the spread trades back up to twelve cents or higher. Current Trade Strategy: Stand aside.

Australian dollar vs. New Zealand dollar - The September Australian dollar/New Zealand dollar spread currently finds technical support at the weekly 2005 high of .0803 (old resistance), the July 2nd weekly low of .0799 (premium Australian dollar), the major weekly Fibonacci .618 retracement at .0799 (as measured between the 2005 all-time weekly low of .0360 and last year's all-time high of .1510), and this year's current weekly low of .0793.

This could be an important make-it-or-break-it point for the spread. A weak close below eight cents could hammer the spread down to support just below the four cent area: the weekly 2003 low was at .0392, the weekly 2004 low was at .0395, and the weekly all-time low in 2005 low was at .0360. This would be an historically low price area for the spread worth monitoring for a long position. Important technical resistance is at this year's current weekly high of .1004 (premium Australian dollar) followed by the current major weekly Fibonacci .382 retracement at .1067 (as measured between last year's all-time high of .1510 on the weekly chart and this year's current weekly low of .0793) in confluence with the weekly October and November reaction highs of .1077 and .1076. If the rally does not end here the spread may run to the current major weekly Fibonacci .618 retracement at .1236 (as measured between last year's all-time high of .1510 on the weekly chart and this year's current weekly low of .0793). Bottom line: The spread is not currently at the extreme price levels that interest us, but a clean break below eight cents has the potential to take it there in a hurry.

Current Trade Strategy: Stand aside.

British pound vs. Euro currency - The September British pound/Euro currency spread finds near term technical resistance between last week's high of .6693 (premium sterling) on the daily chart and this year's current all-time high of .6735 (premium British pound) on the weekly chart. With England's current interest rate at 5.75% and the ECB's rate set at 4%, sterling has outperformed the Euro currency due to the premium rates paid to investors on British investments. The September British pound/Euro currency spread has not closed below the 18-day Moving Average since mid-May. This tells us that the momentum of this current run is still strong. Also, since the low of the year was established back in March this market has only broken a previous weekly correction low one time since then. Therefore, a close below the 18-day Moving Average and a break below a weekly correction low could be used to identify that the trend is reversing. If this occurs the British pound/Euro currency spread could go back down to this year's current weekly low of .6107 (premium British pound). A clean break below it could cause a swift decline to the current intermediate weekly Fibonacci .618 retracement at .5787 (as measured between last year's weekly low of .5201 and this year's current all-time weekly high of .6735 ). If the spread does not stabilize here the spread could get plummet to the major weekly Fibonacci .618 retracement at .5372 (as measured between the 2003 all-time weekly low of .4529 and this year's current all-time weekly high of .6735) or even last year's weekly low of .5201. Bottom line: Watch for a close below the weekly 18-bar Moving Average and then look to trade this spread from the short side. Current Trade Strategy: Look for a technical signal to initiate a short position.

Euro currency vs. Swiss franc - The September Euro currency/Swiss franc spread reached a new all-time high of .5465 (premium Euro currency). Since this spread is in un-charted territory, there's no old highs to look to for resistance levels. Until a reversal signal occurs it could just keep running toward the psychological 60 cent area. Although Switzerland is not a complete member of the European Union, they are still so closely linked that their economy is highly correlated to that of "Euroland". And since the ECB's current interest rate is at 4% while Switzerland is at 2.5%, capital flows tend to favor the Euro currency over the Swiss franc right now. This has driven the spread between these two currencies up to record levels. An important support level we are watching for to identify a trend change is the weekly 18-bar Moving Average. The Euro currency/Swiss franc spread has not closed below the weekly 18-bar Moving Average since December 2005. Therefore, a close below the weekly 18-bar Moving Average would be a major event that could signal that the bull run is over. If this happens, traders should look for opportunities to get short. Initially, this could cause a minimum drop to the current major weekly Fibonacci .382 retracement at .4923 (as measured between the weekly 2005 low of .4081 and this year's current all-time high of .5443 on the weekly chart) in confluence with this year's current weekly low of .4906. Further support is at the 2004 and 2005 weekly highs of .4762 and .4761 (old resistance levels). After that look for a decline to the current major weekly Fibonacci .618 retracement at .4601 (as measured between the weekly 2005 low of .4081 and this year's current all-time high of .5443 on the weekly chart). Bottom line: Watch for a close below the weekly 18-bar Moving Average and then look to trade this spread from the short side. Current Trade Strategy: Look for a technical signal to initiate a short position.

Euro currency vs. Japanese yen - The September Euro currency/Japanese yen spread reached a new all-time high of .5577 (premium Euro currency) on the weekly chart. Since this spread is in un-charted territory (just like the Euro currency/Swiss franc spread), there's no old highs to look to for resistance levels. Therefore, it could be on the way to the psychological 60 cent area. The fact that the European economy as a whole has by far outperformed the Asian economy as a whole has pushed more investment capital into Europe than Asia. Investors have a lot more incentive in Europe as the ECB's current interest rate is at 4% while Japan's current interest rate is at a mere .50%. Therefore, it's no surprise that the Euro has greatly outpaced the yen. Near term technical support is located at the weekly 18-bar Moving Average (the Euro currency/yen spread has not closed below the weekly 18-bar Moving Average since February 2006) followed by the weekly June correction low of .5139. Since last year's weekly low was established in February 2006, the Euro currency/Japanese yen spread has only broken a previous weekly correction low three times. Therefore, a close below the weekly 18-bar Moving Average or a break below a previous correction low on the weekly chart could be used as indications of a trend change. If this occurs, look for a decline to this year's current weekly low of .4541 (premium Euro) in confluence with the current intermediate weekly Fibonacci .382 retracement at .4519 (as measured between the weekly 2005 low of .2891 and this year's current all-time weekly high of .5526). If the spread does not establish support in this area it could decline to the psychological .4000 mark or even the current intermediate weekly Fibonacci .618 retracement at .3898 (as measured between the weekly 2005 low of .2891 and this year's current all-time weekly high of .5526) followed by the weekly 2005 high of .3832 (old resistance). Bottom line: Watch for a close below the weekly 18-bar Moving Average and then look to trade this spread from the short side. Current Trade Strategy: Look for a technical signal to initiate a short position.

British pound vs. Japanese yen - The September British pound/Japanese yen spread recently traded to a new high of 122.47 which is the highest level this spread has seen since 1982. Right now there is no technical resistance until the major monthly Fibonacci .618 retracement at 135.50 (as measured between the 1980 high of 194.64 and the 1995 low of 39.83). In February the spread closed below the weekly 18-bar Moving Average for the first time in nearly a year and signaled a trend change...but it sure didn't last long!

Four weeks later the spread closed back above the weekly 18-bar Moving Average and three weeks after that it hit a new multi-decade high. Although it didn't pan out the last time around, a close below the weekly 18-bar Moving Average could still be a potential indicator to identify a trend change. If this occurs look for an initial decline to the current weekly Fibonacci .382 retracement at 106.19 (as measured between the 2005 low of 83.05 and the current new high of 120.50). Further support may be found at the current weekly Fibonacci .618 retracement at 97.36 (as measured between the 2005 low of 83.05 and the current new high of 120.50) followed closely by the weekly 2005 high of 96.71 (old resistance) in confluence with the monthly 1998 high of 96.71 (old resistance). With the European economy outperforming the Asian economy and England's interest rate a good 1.75% more than the ECB's current interest rate, the British pound has surged against the yen. When one compares the Bank of England's rate of 5.75% against the Bank of Japan's rate of .50%, it's obvious where the incentive is for global investors at the moment. Bottom line: Watch for a close below the weekly 18-bar Moving Average and then look to trade this spread from the short side. Current Trade Strategy: Look for a technical signal to initiate a short position.

Metals

Platinum vs. Gold - The October platinum/gold spread finds near term technical resistance at the daily June high of $657.20 (premium platinum) followed closely by the current contract high of $663.70. A breakout to new highs would put the spread in un-charted territory and could quickly send it to the psychological $700 mark. For seven consecutive months, the October platinum/gold spread has been unable to break a previous correction low on the weekly chart. On the weekly continuous chart, this spread has not closed below the weekly 18-bar Moving Average since the second week of January. Therefore, a break below a previous weekly correction low and/or a close below the weekly 18-bar Moving Average could indicate that the trend for the spread has made a reversal in direction. If this happens the October platinum/gold spread could pull back to the current major daily Fibonacci .382 retracement at $589.30 (as measured between the daily December low of $469.00 and the current spread high of $663.70) in confluence with the daily November spike high of $589.00 (old resistance).

If the spread does not recover from this level it could plunge to the current major daily Fibonacci .618 retracement at $543.40 (as measured between the daily December low of $469.00 and the current spread high of $663.70). After that the spread may not find hope for support until a double bottom between the weekly December low of $481.70 (premium platinum) and the weekly October low of $478.50. (Note to traders: This spread should be traded as a ratio of two platinum:one gold since one platinum contract controls 50 ounces of platinum while one gold contract controls 100 ounces of gold). Bottom line: This is an extremely risky spread, but high risk-takers may want to look for set-ups to get short after a close below the weekly 18-bar Moving Average and/or a break below a previous weekly correction low. Current Trade Strategy: Look for a technical signal to initiate a short position.

Energy

Crude Oil vs. Heating Oil - Everyone knows that demand for heating oil should rise in the winter due to the cold weather. Therefore, it is not unusual for heating oil prices to rise faster than crude oil prices during that time. However, the February '08 heating oil recently traded at a premium of over nineteen dollars per barrel above the price of February '08 crude oil. Looking at a weekly continuous chart dating back to 1983, we can see that there have only been two other times when heating oil had this kind of premium over crude oil. On a daily chart, this spread has closed above the 18-day Moving Average most of the time since late April. It has also made a series of higher highs since it broke out in late March. On a weekly basis, the February '08 heating oil/crude oil spread has not broken a previous weekly correction low since it bottomed out during the first week of March. Also on the weekly chart, this spread has closed higher than the previous week for nine out of the last twelve weeks. A break below a previous correction low and consistent closings below the 18-day Moving Average could indicate that the bull run is over. We will continue to monitor this spread for a potential opportunity to trade it from the short side. Bottom line: Watch for a close below the 18-day Moving Average and a break below a previous weekly correction low and then look to trade this spread from the short side. Current Trade Strategy: Look for a technical signal to initiate a short position.

Crude Oil vs. RBOB Blended Gasoline - In mid-May, September crude oil settled at $67.89 a barrel and September RBOB gasoline settled at $2.2026 a gallon. Since there are 42 gallons in a barrel, the converted price of September RBOB gasoline would be $92.51 a barrel. This means that September RBOB gasoline closed at a premium of $24.62 more per barrel than crude oil.

Historically, this year is one of only four different times in the last twenty-two years that the closest delivery month of RBOB gasoline has had a premium of twenty dollars or more per barrel over the same delivery month of crude oil: In May of 2004, RBOB gasoline peaked at a premium of $20.46 a barrel above crude oil. In August of 2005, RBOB gasoline peaked at a premium of $24.15 a barrel above crude oil. In May of 2006, RBOB gasoline peaked at a premium of $29.84 a barrel above crude oil. 2006 and 2007 are the only times that the spread between the September delivery contracts exceeded twenty dollars. RBOB gasoline can then be considered "high"

relative to crude oil. While crude oil is only a few dollars off the all-time high made last year, RBOB gasoline ran up even faster due to refinery capacity issues. No matter how much crude oil becomes available, there's only so much of it that can be turned into gasoline at a time. But the tide has turned. In late May, the September crude oil/RBOB gasoline signaled a trend change when it closed below the 18-day Moving Average for the first time in over three months and it closed significantly lower on the week for the first time since early February. A close below the weekly 18-bar Moving Average for the first time since mid-February was additional confirmation of the trend change. The September crude oil/RBOB gasoline spread then plunged near thirteen dollars by mid-July. But even though the crude oil/RBOB gasoline spread has already made a substantial decline, there is a lot of downside potential ahead. For the last ten years, when the gasoline/crude oil spread has peaked out and reversed it dropped back near four dollars or lower (premium gasoline) by the end of the year. Therefore, the probabilities seem favorable for a further decline of as much as nine dollars more in price. The ratio between crude oil and RBOB gasoline reached an historic extreme and reversed as well. The ratio allows us to view the percentage mark-up that gasoline has over the price of crude oil.

In early May, just before the peak of the price spread, the front trading contract month of RBOB gasoline closed at a price that was just over 58% above the price of crude oil. That put the ratio at 1.58:1. Looking at the weekly closing prices going back to December 1984, there were only three other times when the ratio or percentage mark-up got this high in favor of gasoline. Now the ratio has been in a decline for nearly two months. This is more confirmation of the trend change. Our focus will now be on managing the trade and adding to the position. Bottom line: Trade this spread from the short side. Look to increase the position size as the spread declines.

Current Trade Strategy: The long September crude oil/RBOB gasoline spread entered at approximately +22.15 as per the June 18th Trade Alert should be liquidated only on a two consecutive day close above +24.75 (premium September RBOB gasoline). Stay tuned to further Trade Alerts for recommendations on adding additional spreads.

Heating Oil vs. RBOB Blended Gasoline - Looking at the December delivery contracts, heating oil recently traded at a premium of over twenty cents above the price of RBOB gasoline. Consider this December contract is for winter month deliveries, it comes as no surprise that heating oil has the premium - usage of heating oil goes up in the winter and demand for gasoline usually drops as driving decreases. However, the premium is historically extreme. On a monthly closing basis, there have only been four times in the last twenty-two years that heating oil has been priced twenty cents or more above RBOB gasoline. On a weekly closing basis, there have been just twelve different times since 1985 that heating oil has been priced twenty cents or more above RBOB gasoline. History suggests that the December heating oil/RBOB gasoline spread is trading at a price level to be monitored for a set up on the short side. Currently, technical resistance may be located at the major daily Fibonacci .618 retracement at +2093 (as measured between the contract high of +2498 and the current contract low of +1437) followed closely by the late March reaction high of +2134. This would be a good level to look for a technical signal to get short. But if the rally does not end here the spread just might challenge the contract high of +2498. If the December heating oil/RBOB gasoline spread continues to trend lower, expect it to eventually invert so that the RBOB gasoline trades at a premium to the heating oil contract. Bottom line: Look for a set-up to trade the December heating oil/RBOB gasoline spread from the short side if it gets above twenty cents (premium heating oil). Current Trade Strategy: Look for a technical signal to initiate a short position.

Livestock

Live Cattle vs. Lean Hogs - The December live cattle/lean hog spread traded just below 35 cents (premium cattle) in July and then plunged. On a weekly closing basis, there have been five times since 1980 when cattle reached a premium this large over the hogs: in December 1998 cattle peaked out at a premium of 37.52 over hogs, in September 2002 cattle peaked out at a premium of 34.72 over hogs, in November 2003 cattle peaked out at a premium of 49.30 over hogs, in January 2006 cattle peaked out at a premium of 37.65 over hogs, and in April of this year cattle peaked out at a premium of 35.27 over hogs. Historically, this is an ideal area to watch for a set up on the short side of the spread. Since the spread made it's low last November, the December live cattle/lean hog spread made a series of higher highs and higher lows in a volatile fashion. After establishing the spread low of 24.22 low in November, the December live cattle/lean hog spread rallied 5.23 cents to a high of 29.45 in January and then pulled back 3.63 cents to a correction low of 25.82 in February. From this correction low the spread then rallied 6.18 cents to a high of 32.00 in April and then pulled back 4.40 cents to a correction low of 27.60 that same month. From there the spread then rallied 5.40 cents to a high of 33.00 in May and then pulled back 4.40 cents to a correction low of 28.60 In June. From the June correction low, the December live cattle/lean hog spread rallied 6.32 cents to a new spread high of 34.92 in July and recently pulled back 4.72 cents off the high. If the spread exceeds 35 cents (premium cattle) we will be looking for a technical signal to enter on the short side. We will also monitor the February cattle/hog spread for a set-up. The February spread recently peaked at a new high just below 32.5 cents (premium cattle). If this spread reaches 35 cents or higher it may qualify for a set-up on the short side as well. Historically, after this spread peaks out it has a tendency to drop down near the seven cent level or even lower. Over the last twenty-six years, 2002 is the only year where the spread did not trade at 7.00 or lower on the weekly chart. 

Bottom line: Watch for a set up on the short side of the December and February cattle/hog spreads after it trades above the 35.00 mark. Current Trade Strategy: Stand aside.

Feeder Cattle vs. Lean Hogs - Historically, the feeder/lean hog spread likes to top once they trade near 49 cents (premium hogs) or higher. On the weekly chart, we can see that this spread has annual highs of 48.85 in 2002, 52.47 in 2003, 52.40 in 2004, 55.17 in 2005, and 53.40 last year. In early July, the October feeder cattle/lean hog spread climbed to a new contract high of 50.65 (premium feeders) and then pulled back over six cents. The technical make-up of this spread is not currently well-defined. Therefore, we will give it more time for a potential set-up to materialize. 

Bottom line: The October feeder/hog spread has recently reached a price level that qualifies for a set up on the short side. Current Trade Strategy: Waiting for a technical signal to get short.

Feeder Cattle vs. Live Cattle - The August feeder cattle/live cattle spread recently traded to a multi-month high of over 24 cents (premium feeders).

Historically, we like to be short feeders/long live cattle when the feeder cattle trades at a premium of 22 cents or more over the live cattle. In October 2001 feeders peaked out at a premium of 22.07 over live cattle, in the summer of 2004 feeders peaked out at a premium of 33.15 over live cattle (all-time record), in the summer of 2005 feeders peaked out at a premium of 32.62 over live cattle, and in June of last year feeders peaked out at a premium of 32.27 over live cattle. Unfortunately, the August contracts don't give us much time. So we will monitor the October feeder cattle/live cattle spread instead. This one recently traded to a new contract high of just over 20 cents (premium feeders) so it is on our watch list. Since the bottom was made during the second week of January, the October cattle/live cattle spread has only broken a previous weekly correction low one time. If it can reach a high of at least 22 cents or higher we will analyze the technical price pattern and look for set-ups to get short. Looking even further out, the April '08 cattle/live cattle spread was at a spread of only eight cents just three weeks ago. If this spread turns south and contracts to even-money (or even inverts) we will then be stalking it for opportunities on the long side. Feeders do not trade at the same price or a discount to live cattle very often. (Note to traders: This spread should be traded as a ratio of four feeders: five live cattle since the feeder contracts control 50,000 lbs. each and the cattle contracts control 40,000 lbs. each). Bottom line: Monitoring the October and April feeder/live cattle spreads for a trade to 22 cents or higher. 

Current Trade Strategy: Stand aside.

Grains

Soybeans vs. Wheat - The March September soybeans/wheat spread is currently trading near $3.00 (premium soybeans). This does not interest us at the moment since we are looking for historical extremes. To get our attention this spread needs to gain or lose another two dollars. Historically, this spread has been a great buy when it trades at $1.40 or lower on the weekly chart (premium soybeans). It then tends to run back up to at least the $3.00 area. And going back to 1980, we notice that the spread is "pricey"

when beans are trading $5.20 or more than the price of wheat. On the weekly continuous chart, this spread peaked out at $5.53 3/4 (premium soybeans) in 1983, $5.21 1/4 (premium soybeans) in 1984, $6.49 (premium soybeans) in 1984, $5.20 (premium soybeans) in 1997, and $6.57 (premium soybeans) in 2004. Therefore, if the bean/wheat spread gets above five bucks we will be looking for a set up to short the beans and get long on wheat, if it drops back below $1.40 or lower getting we will be looking for a set up to buy the beans and get short on wheat. Bottom line: We are monitoring this spread for a trade above five dollars or a trade below a buck and a half. 

Current Trade Strategy: Stand aside.

"Crush Spread" - Soybeans vs. Soy Meal & Bean Oil - When a soybean is "crushed", it results in soy meal and soy oil. The relationship between the prices of soybeans and these two soy derivatives is an important one as it is monitored by producers to determine whether to "crush" or process the beans or not. When the "crush spread" is high, producers will process more soybeans to take advantage of the bigger profit margins. When the "crush spread" is low, producers will usually scale back their operations until the profit margin increases again. The "crush spread" is calculated by subtracting the price of soybeans from the sum of soy meal plus bean oil.

Since we are analyzing these market spreads from a technical and statistical viewpoint, we will skip the fundamental discussion of this spread. Instead, we will note that the new crop "crush spread" between November soybeans and December meal plus December bean oil is trading in the middle of it's twenty-six year range. The same spread for the 2008 soy crop is at a similar level. Therefore, we are not inclined to jump into a trade at the current time. However, we want to keep this spread on our watch list in the event that it reaches a historical extreme in the future. 

Bottom line: Nothing to do until there's a trade set up at historic extremes. Current Trade Strategy: Stand aside.

Bean Oil vs. Soy Meal - Since 1980, this is only the third time that bean oil has been this expensive compared to soy meal. These two markets are the derivatives of a "crushed" soybean. The most likely reason that bean oil has outperformed the meal for the last couple of years is the high demand for biofuels. After the bean oil/soy meal spread peaks or bottoms at historic extremes it tends to make a substantial trend in the opposite direction for quite some time. Historically, the other two time this spread peaked out at this level or higher it then declined for at least the next two and a half years. This is good news as it means there may be a lot of potential opportunities to add to positions on the way down. Technically, the bean oil/soy meal spread has only closed below the weekly 18-bar Moving Average once since the beginning of March. It has since recovered and hit a new twelve and a half year high. Therefore, the momentum is still favoring the upside of this spread. Traders should wait for a close below the weekly 18-bar Moving Average before looking to initiate a spread trade on the short side. Bottom line: Monitoring the bean oil/soy meal spread for technical signs of a reversal. 

Current Trade Strategy: Stand aside.

Soy Meal vs. Corn - In February, the price of soy meal dropped to a ten and a half year low against the price of corn. Since 1980, the only other time that the meal/corn spread traded at a price spread that low was in 1996. In April, a technical signal identified a potential trend change. Traders who took the buy signal had their patience tested when the spread spent the next several weeks in a volatile trading range. But in the second half of June patience paid off as the spread finally rocketed up to multi-month highs.

Historically, this spread still has a lot further to go to the upside before it even reaches the middle of it's average trading range. With any luck, the huge corn crop (planted because of insatiable ethanol demand) could even move this spread into an historic price level on the upside. If so, you can bet that we will be looking for set-ups to trade it on the flip side!

Technically, the December soy meal/corn spread has closed above the 18-day Moving Average consistently for a month straight. Therefore, we can now utilize the Moving Average for an exit signal to eliminate the original risk on the trade and lock in a trailing profit. Bottom line: Trade this spread from the long side. Look for set-ups to increase the position size.

Current Trade Strategy: The long December soy meal/corn spread entered as per the April 12th Trade Alert (long Dec. meal at approximately 220.00 and short Dec. corn at approximately $3.82) should now be liquidated on a two consecutive day close below the 18-day Moving Average. Stay tuned to further Trade Alerts for potential recommendations on adding additional spreads.

Wheat vs. Corn - Historically, this spread has been a great short sale when it trades near $1.80 or higher (premium wheat). Since 1980, there have been seven occurrences when wheat has had a premium of just near $1.80 or higher than the corn market. In every instance it resulted in a decline that brought the spread back below the one dollar mark. Most of those times it brought the price difference to less than fifty cents. And one of those times it even caused the spread to "invert" so that corn was trading at a higher price than wheat! Now that we have identified a price spread that is at the extreme end of the historic price range (several standard deviations from the mean), we are just waiting for the "technicals" to signal that the historic mega-rally has run it's course. The upward momentum of this spread still looks strong as it has closed above the 18-day Moving Average every day for two months straight. Also, the weekly price structure remains bullish as the December wheat/corn spread has closed higher than the previous week's close for eight out of the last nine weeks. A close below the 18-day Moving Average and a negative weekly close could be a good clue that it's time to initiate short positions in the December wheat/corn spread. Bottom line: Watch for a close below the 18-day Moving Average and a break below a previous weekly correction low and then look to trade this spread from the short side. 

Current Trade Strategy: Waiting for a technical signal to initiate a short position.

Corn vs. Oats - The December corn/oat spread is sitting near ninety cents.

This is smack in the middle of the trading range of the last twenty-six years. We are only interested in this spread if it trades to the historic extremes. On a weekly closing basis, there are only four times in the last twenty-six years that the corn market has been priced near $1.80 or more than the oat market: in September 1983 corn reached a premium of $1.86 1/2 over oats, in April of 1984 corn reached a premium of $1.81 1/4 over oats, in July of 1996 corn reached a record premium of $2.88 over oats, and in February 2007 corn reached a premium of $1.79 3/4 over oats. This spread has been a good candidate for a short trade when it traded at these extreme levels. On the other side of the equation, the corn/oat spread is usually worth looking at from the long side when it drops down to 20 cents (premium corn) or less. For now, we will just keep this spread in our peripheral vision and look closer only if it nears the historic extremes of the spread price range. Bottom line: This spread has to gain at least 80 cents or lose at least 70 cents before we are even remotely interested.

Current Trade Strategy: Stand aside.

Wheat vs. Oats - Historically, the wheat/oat spread has been a good trade on the short side once it reached $2.60 or higher (premium wheat). Currently, the December wheat/oat spread is substantially higher than that as it's trading at an eleven year high just above $3.93. History shows that after this spread peaked out at $2.60 or higher it often declined to a spread of $1.50 or lower. So this spread is currently in the hunt for a short trade.

On the daily chart, the December wheat/oat spread has closed above the 18-day Moving Average every day for nearly two months straight. This indicates that upward momentum is still strong. On a weekly basis, the December wheat/oat spread has closed higher than the previous week's close for nine consecutive weeks. This price structure is bullish. Therefore, a close below the 18-day Moving Average and a negative weekly close could indicate that the bull run has terminated and signal an entry on the short side of the spread. Once this occurs traders should consider shorting this spread in anticipation of a decline of at least two dollars of the high.

Bottom line: Watch for a close below the 18-day Moving Average and a break below a previous weekly correction low and then look to trade this spread from the short side. 

Current Trade Strategy: Waiting for a technical signal to initiate a short position.

Soybeans AND Corn Combo - The sum of March '08 soybeans and March '08 corn recently hit a high of $13.52 1/2. Historically, this combo has been a fantastic short sale once it traded near thirteen dollars or higher.

History shows that once the corn+soybean combo peaks out after reaching $13.00 or higher on the front delivery contracts it tends to decline in value by over 40% from the highs. If this happens again from the current levels, it could take the March '08 soybean+corn combo down near eight dollars or even lower. The price pattern of this combo and the momentum of the bull run as of late have been pretty inconsistent. This makes it difficult to apply our technical entry and exit parameters at the moment.

Nonetheless, with the combo at historic highs we will continue to monitor it in the hope that technical entry and exit parameters will soon manifest.

Bottom line: Look for a set up to get short in the March '08 bean+corn combo.

Current Trade Strategy: Monitor for an entry level.

Soybeans AND Wheat Combo - In mid-July, the sum of March '08 soybeans and March '08 wheat reached a new record high of over $16.00. Historically, this combo has been qualified for a short sale once it traded to $13.50 or higher on the front delivery contracts. Since 1980, this year is only the fifth time that the combo has traded above $13.50. Historically, when the soybean+wheat combo peaks out after reaching $13.50 or higher on the soybean+front delivery contracts it tends to decline back to at least somewhere near eight dollars or lower. The previous four declines have a been a minimum drop of 43% in value from the final high. On the daily chart, the March '08 soybeans+wheat combo has closed above the 18-day Moving Average every soybeans+day for over two months straight. On a weekly basis, the March '08 soybeans+wheat combo has closed higher than the previous week's close soybeans+for eleven out of the last thirteen weeks. Therefore, a close below the 18-day Moving Average and a negative weekly close could indicate that the trend could be ready to change direction. This could justify an entry on the short side of the soybeans+wheat combo. Bottom line: Look for a set up to get short in the March '08 bean+wheat combo. 

Current Trade Strategy: Monitor for an entry level.

Corn AND Wheat Combo - The sum of March '08 corn and March '08 wheat is at an eleven year high. In June the March '08 corn+wheat combo peaked out at

$10.57 3/4 and then dropped over a dollar. This is only the third time since 1980 that this combo has traded above the nine dollar mark. After it peaked above $9.00 in 1980 and in 1996, the combo then lose over half of it's value and declined below $4.50. Unfortunately, the technical criteria we use to identify entry and exit signals is currently a bit hazy, making it difficult to issue trade suggestions. The good news is that the previous two times that the corn+wheat combo peaked out above $9.00 and then declined below $4.50 it took several months for the move to conclude. This means that there could be plenty of time to get in once the trend has reversed.

Bottom line: Look for a set up to get short in the March '08 corn+wheat combo. Current Trade Strategy: Monitor for an entry level.

Soybeans AND Corn AND Wheat Combo - The sum of March '08 soybeans, March '08 corn and March '08 wheat recently came within seven cents of the big psychological $20.00 mark. Since 1980, this year is only the fifth time that the combo has traded near $17.00 or higher. Historically, when the soybean+corn+wheat combo peaked out after trading at a price of $17.00 soybean+corn+or higher on the front delivery contracts it always dropped back to at least somewhere around $10.50 or lower. The previous five declines have a been a minimum drop of 42% in value from the final high. On the daily chart, The March '08 soybeans+corn+wheat combo has not shown consistency with momentum or price structure so it's currently difficult to discern what might constitute as an entry signal. But much like the corn+wheat combo, historical analysis shows that once the combo peaked out it took several months for the decline to play out. Hopefully, that will give traders ample time to recognize a trend change when it occurs and plenty of opportunity to get in with the trend. Bottom line: Look for a set up to get short in the March '08 bean+corn+wheat combo. 

Current Trade Strategy: Monitor for an entry level.

Miscellaneous

Hogs vs. Corn - The cost of production in the hog business can be monitored by the price of corn. As a matter of fact, some figures put corn prices as representing as much as nearly three-quarters of what it costs to raise a hog. The hog: corn ratio is often used as a historical gauge to predict where hog supplies will be twelve to eighteen months out in the future.

Traditionally, a ratio of 2:1 is used as it is roughly estimated that it takes about one 5,000 bushel contract of corn to feed the equivalent of two contracts of lean hogs. In February, the spread between one hog contract and two corn contracts dropped to a low only seen one other time since December of 1979! After bouncing sharply into April, the spread pulled back one more time in mid-June and established a double bottom on the daily chart of the December hog/corn (x2) spread. The spread has now rallied to the highest level since last Autumn and given a technical confirmation that the bottom is in. Traders should now be focusing on trading on the long side of this spread. Fibonacci retracements on the daily chart may offer ideal technical entry points. Bottom line: Buy pullbacks on the December hog/corn spread with a ratio of one December hog contract and two December corn contracts. Current Trade Strategy: Monitor for an entry levels.

Soybeans vs. Cotton - Historically, soybean and cotton prices have had an influence on one another due to the ability to substitute acreage. When one is historically too low in comparison to the other, the farmer will usually plant more of the higher price crop when he can. This is obvious as the name of the game in farming (and any other business, for that matter!) is profit margin. Since last August, soybean prices have been outperforming cotton prices. This took the spread up to levels only seen two other times in the last twenty-seven years. Now the tide seems to be turning in favor of cotton as the soybean/cotton spread recently closed below the weekly 18-bar Moving Average for the first time since last September on the weekly continuous chart. Also, the weekly soybean/cotton spread broke below a previous weekly correction low for the first time since last year's low was established last August. Traders should now consider shorting the spread on rallies into technical resistance levels. Bottom line: Look for opportunities to short the March soybean/cotton spread. 

Current Trade Strategy: Monitor for an entry level.

Crude Oil vs. Sugar - This spread is based on the observation that the price of crude oil can impact the price of sugar due to it's usage in ethanol. As crude oil prices rose substantially from 2004 to 2006, sugar rose as well.

Sugar was rapidly being converted to ethanol In South America as Brazil grappled with gasoline shortages. Then as crude oil prices plunged in the latter part of 2006, sugar dropped substantially as well. We are going to look at this spread as a ratio to give the markets equal dollar value. To calculate this ratio, first find the underlying value of the contracts being traded in both markets. Then divide the largest value by the smallest value. This will tell you how may contracts of the cheaper market you need to equal the same value of that of the market with the larger premium. For example, March crude oil closed at $72.62 a barrel on July 17th. Since each contract controls 1,000 barrels of crude oil the underlying value for one contract of March crude oil is $72,620 ($72.62 X 1,000 barrels). 

March sugar closed at 10.32 cents a pound on July 17th. Since each contract controls 112,000 lbs. of sugar the underlying value for one contract of March sugar is $11,588.40 (10.32 cents X 112,000 lbs). Divide the value of the March crude oil contract ($72,620) by the value of the March sugar contract ($11,588.40) and you get 6.28. Therefore, we need roughly six contracts of March sugar to equal the value of one contract of March crude oil for a ratio of sugar: crude oil of roughly 6:1. Currently, the 6:1 spread ratio of sugar: crude oil is trading at levels only seen one other time in the last twenty-four years. The only other time this ratio spread was this high it dropped severely and changed dramatically in favor of the sugar. The 6:1 ratio spread between March crude oil and March sugar peaked out in June on the daily chart and pulled back to support at the June and late May daily reaction lows. On a weekly basis, the March crude oil/sugar ratio spread has not broken a previous week's correction low since the low of the year was made in January and it has not close below the weekly 18-bar Moving Average since January as well. Therefore, a break below a previous weekly correction low and a close below the weekly 18-bar Moving Average could be a potential trigger to enter a ratio spread consisting of short one March crude oil and long six March sugar contracts. Of course, a breakout to new highs after the spread is entered should be taken as a signal to exit the short spread and cut losses. You can always get back in if a new signal is triggered. Bottom line: Watch for a reversal signal to enter the 6:1 ratio spread in October sugar vs. October crude oil. Current Trade

Strategy: Monitor for an entry signal.

Disclaimer: There is risk of loss in all commodity trading. The data contained are believed to be reliable, but have not been independently verified by Pearce Financial. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice. Pearce Financial will not be responsible for any indirect, compensatory, or consequential damages, including loss of profits which may result from reliance on this data. Pearce Financial and/or its Principals and employees may or may not follow strictly any or all of the trading recommendations contained herein. The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.

© 2007 Pearce Financial, LLC
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