Cash prices remain active and demand strong. The U.S. dollar is trending lower, and there is renewed optimism that export activity will stay strong. This is due, in part, to exports to China (something that has not occurred since 2003). At the same time, recent technical activity suggests futures may have topped.
Chart activity shows upward price acceleration and a key reversal. A bearish key reversal is when the market trades to a new high, exceeds the previous day’s trading range, and finishes below the previous day’s close. In other words, a wider trading range and a negative finish.
August live cattle futures recently posted a very prominent bearish key reversal. In addition, a double-top is also in place. A double-top is when a market establishes a contract high, corrects downward, rallies back to the previous high, and then fails.
August futures peaked at $127.50 on May 4, dropped to under $117.00 by late May, only to rally back to $127.65 on June 6, the day prices peaked and posted the bearish key reversal. Since then, August futures has dropped and is trading under $118.00.
It may be difficult to execute strategy with current future prices well below the current cash market. Current cash prices may be as much as $15.00 or $20.00 higher than deferred futures.
Keep in mind that futures contracts reflect future price expectations, and not today’s cash market. Price charts can often aid in the decision to move forward with strategy. The recent signals are really nothing more than the reflection of market participants anticipating future price expectations. Heed the chart warnings.
Two strategies come to mind: Sell futures and purchase a call option. Or, purchase a put, which provides a price-flooring mechanism and leaves the upside open for price appreciation. These two strategies accomplish the same basic task of shifting risk, should prices move lower.
While no strategy is perfect, doing nothing works extremely well as long as prices trend higher. However, when prices trend lower, doing nothing can be an extreme strategy that allows for the absolute worst outcome.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email. BY BRYAN DOHERTY.
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