Friday’s action in the February live cattle-futures setup one is of the few short trading opportunities we’ve seen this year in the cattle markets. The trend has been higher all year long. We’ve commented at times that the market had gotten ahead of itself and this remains the case. Currently, it appears that large and small speculators are the only ones adding to long positions at these levels. Commercial traders have sold around 15,000 contracts around the $170 area.
Furthermore, typical year-end index rebalancing is taking place over the next few weeks. The whisper is that this will shave another 15,000 off the total net-long position. When these issues are used as the context for the technical situation playing out, we run into one the rare times when the odds may be on the short side in the live cattle market.
Throughout 2014, the cattle market has continued to climb and rightfully so. We’ve discussed the macroeconomic factors in this market in great detail in the past. Today, we’re focusing on a technical trading opportunity. Our best trades on the short side of the live cattle market this year have been setup through bearish momentum divergences.
The Setups
There are two types of bearish momentum divergences to look for and both are predicated upon the relationship between short-term market momentum and the price action itself. The first is when a market tests a recent high but fails miserably. This leads to a much lower reading on our short-term momentum indicator, even though the prices were nearly the same. The second type of bearish momentum divergence occurs when the market makes a new high, but the momentum indicator fails to record a higher reading in conjunction with price.
These setups are labeled on the chart below with, “1” being the initial high and, “2” being the second wave or test of the recent high.
The first two setups are classic higher highs tied to lower momentum readings. The current one is based on a test and fail. More importantly is that commercial trader momentum has turned negative as well. We only take trades in line with the commercial traders’ momentum. Their actions are based on the best models and information available in their respective markets and their buying and selling power eclipses the rest of the markets’ participants. This lends further credence to the near-term bearish nature of this top in the live cattle market.
COT Signals will be actively looking to sell February live cattle futures against the recent highs while looking for a test of the trend line that has supported this market throughout the year.
More information, click here.
