The latest The Spread Trader segment.
The Intersection Between Technical Analysis
and
Commodity Futures Spreads
I, Brent Futz have worked as a commodity futures trader over a period that spans seven US presidents and two marriages.
That period also spans the evolution of commodity futures trading from the trading floor era to the introduction of electronic trading.
With respect to trading strategies, advances in technology have led to the adoption of technical analysis and to a trading community that didn’t exist 40 years ago.
The transition from open outcry to electronic trading has had another effect on trading strategies; today, many do not address the mechanics of futures trading, specifically the relationship between contracts known as calendar spreads.
What hasn’t changed is the relevance of spread trading to markets; in fact, it is perhaps more consequential than ever.
Trading communities are polarized, and traders identify themselves as either fundamental or technical analysts.
Either of these communities can benefit from an understanding of spread trading, an often misunderstood dimension of commodity futures trading strategies.
An empirical example currently playing out in the canola market illustrates the intersection of technical analysis and futures spreads.
Chart 1 is a graph of the July’26/Nov’26 canola spread over the past 6 months.
Chart 2 shows Nov’26 canola futures over the same 6-month period.
Charts 1 and 2 are presented together to provide a visual perspective on the intersection between spreads and technical analysis.
The change in the July/Nov spread from backwardation in March to contango at present has produced a very different chart for the November contract than if the July/Nov spread had continued to invert into a larger backwardation relationship.
If the July/Nov spread had continued in the backwardation that existed in March, it would have resulted in a very different Nov futures chart than the one we see in chart 2.
As a result, the technical analyst is presented with a chart reflecting a change in the spread's orientation towards a contango relationship.
An effective spread strategy should have anticipated the move to a contango relationship and the chart that has evolved over the past two months.
In this case, the change in the spread has preceded the November chart.
This is an example of a spreading strategy intersecting with technical analysis.
Chart 1; July’26/Nov’26 Canola Spread
Chart 2: Nov Canola Futures
The above example demonstrates how technical analysis is influenced by a spreading strategy.
In the case of a technical analysis strategy including a spread trading strategy, it should include a strategy that is objective, a pillar of technical trading.
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Trent Klarenbach
306-463-8607
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