Technically Speaking
Darin Newsom DTN Senior Analyst

Tuesday 06/10/14

The "Young" (Cattle) and the Restless

I have to relate a story that made me chuckle. You know an ag market has made it when national media that don't understand it start talking about it. Over the weekend a news article popped up on the radar of the DTN news team talking about contracts of "young" cattle. Of course it was discussing the recent hysteria in the feeder cattle market that is making participants who actually know about such things restless.

Source: DTN ProphetX

Over the last few months I've received a number of phone calls wanting to talk about young - I mean feeder cattle. The question is always the same, "What are the charts saying about where the top may be lurking?" My answer is as it has been for quite some time, "There is no way to tell."

I know, that seems contradictory to what I wrote about in Tuesday's On the Market column "Markets With a News Chaser" where I discussed how charts will tell us what is going in before we read it in the news. It seems contradictory, but it's not. Feeder cattle at this time are screaming higher in an uptrend characteristic of many short-supply markets before it. But the thing about a short-supply spike rally is that the end is usually just as volatile as the move itself.

Take a look at the weekly chart for the August feeder cattle contract. Note that it set a new high of $204.80 Monday, before pulling back to about $202.70 early Tuesday. The trend (price direction over time) has been up since the market opened on the board the week of August 26, 2013, setting its contract low that same week at $157.90.

What's driving the market higher? Those familiar with my analysis know I start by looking for a correlation between trend and noncommercial buying. Weekly CFTC Commitments of Traders numbers show (third study, blue histogram) that this group consistently added to their net-long futures position up through the week of April 14, 2014 (14,001 contracts). Since then the position has stabilized, with last Friday's report showing a net-long futures position of 13,045 contracts.

So if the extension of the rally from mid-April through early June isn't coming from noncommercial traders, how about the commercial side? The trend in the August to October futures spread (bottom study, green line), shows the August has been weakening in relation to the October since mid-January 2014. Normally this sort of trend in a futures spread reflects a less bullish commercial outlook. However, in the case of livestock spreads (live (old) cattle, lean hogs (as opposed to fat hogs for those in the national media), and feeder cattle) it is more important to see how these spreads relate to five-year averages.

The August to October feeder cattle spread trading at approximately (-$0.50), well below its January high of (+$1.90) but above its five-year average of (-$1.92). The combination of the futures market trading at all-time highs and continued above average strength by the August in relation to deferred futures implies the commercial side of the market continues to support the market.

How long will it last? That's the tricky part. Monday's peak may have been a multi-year high, or the contract could gather itself for another charge to new, unpredictable heights. Our normal gauge of weekly stochastics (second study) is broken and of no value. Notice that this momentum indicator has been above the overbought level of 80% from the beginning, yet sparking no serious noncommercial long-liquidation pressure. One thing I will keep an eye out for is a bearish key reversal on either the weekly chart or long-term monthly chart. While not infallible, such a pattern could be a warning sign of a change in attitude.

Until then, I think DTN Analyst Todd Hultman best summed up the feeder cattle market. We were discussing this blog earlier Tuesday when he concluded that, "If you've got them, sell them." It's hard to argue with that logic when it comes to those actually owning "young" cattle. Inferring the other side of the coin results in the opposite though, "If you don't have them, don't sell them." (Note that neither of those are official recommendations, but rather market observations). That could also be good advice for those who are growing restless and wanting to take a shot at top-picking this market for a speculative/investment trade. It could work, but doing so is akin to stepping in front of a runaway train at this point.

To track my thoughts on the markets throughout the day, follow me on Twitter:\Darin Newsom

Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.

Posted at 8:39AM CDT 06/10/14 by Darin Newsom
Comments (1)
Update: DTN Associate Editor Kim Adrian was able to gather some feeder cattle basis data for me. Plotting the numbers results in a chart showing national average basis (national average cash price minus the nearby futures contract) of (-$5.425) is well below the five-year average of (-$2.64). Recall that one of the early warning signs of a futures market pulling away from its intrinsic value is a weakening of the basis. In other words, the weaker than normal basis could be a warning sign that the market is losing its commercial support. A classic example of a similar situation was 2008 SRW when national average basis collapsed.
Posted by DARIN NEWSOM at 2:00PM CDT 06/10/14
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