We wrote here at Equities.com on June 30th that we thought cattle were finding support in, “Cattle Finding a Bottom into Summer.” Over the last six weeks however, commercial traders have come back to the market on the sell side. Based on the commercial traders’ deteriorating evaluation of the fundamental picture along with the clear technical signals, we’re not only exiting our longs; we’re going short October live cattle.
We frequently discuss the effectiveness of using the commercial trader position as a proxy for fundamental data. We began looking at this years and years ago in the agricultural markets due to the inelastic nature of these annual markets. Adding that these markets are controlled by individuals whose livelihoods are based on the successful calculation of supply and demand and you begin to see the value in their collective forecasting ability. Thus using the commercial hedging activity as a proxy helps put us on the side of the sellers when there is forward production to be sold above their predetermined value area just as the end users put us on the side of the long hedgers supporting undervalued prices.
The live cattle market spent all of spring and early summer in a tight trading range roughly bound by $155 on the high side and supported near $147 on the low side. The market has finally created some action by falling through the support near $148 over the last two weeks with the current low now near $145. 50. Chart readers would see the fall through this level as a breakout and anticipate further weakening of the cattle market. However, there are two very good reasons this may be a short trap triggering a reversal rally into expiration.
This was a quiet week for our trading in spite of the explosive moves created by the Fed. Those brave souls willing to take currency positions ahead of the announcement based on our Discretionary COT Signals were handsomely rewarded as our COT Sell Signal in the U.S. Dollar Index was sent out before 10pm on the 17th.
Our focus took a macro view as we attempt to assimilate contradicting indicators into a general thesis upon which to base our long-term trading. We found, “Hidden Strength in the S&P 500,” in our piece for Equities.com. Once again, ahead of the Fed’s announcement.
There are three markets in the meat futures sector with enough volume and liquidity to attract both hedging and speculative activity. These are the lean hog futures along with the feeder and live cattle markets. The live cattle market is best thought of as cattle on the farm while feeders are the cattle that have made the journey from the farm to the feedlot for fattening prior to slaughter. We’ve written extensively on the broad nature of global supply and demand fundamentals within these markets and included links to our previous research at the end. This week, however, these three markets appear to be setting up for a classic trading opportunity.
This was a busy week. We began on Monday with an exclusive follow up on last week’s “Equity Rally Waves a Caution Flag”, for TraderPlanet in, “Commercial Traders Turn Negative Towards Equity Rally” which focused specifically on the Dow.
Meanwhile, our main piece for the week focused on, “Copper Traders Bailing Out of Record Position.” Specifically, what was going on with the record commercial net long position in the face of a market that appears to be rolling over.
Finally, the equity curve for our commercial live cattle trading program has been updated to show its recent success.
Our Commitment of Traders live cattle trading program continues to excel having won 5 out of its last 7 trades. Furthermore, it looks like the current trade could be another big winner!
This is one of 33 completely mechanical programs whose instructions we deliver by email, nightly.
Once registered, you have access to all 33 which can be combined as you choose on our site to compile an equity curve that meets your trading needs.