Cattle markets come into this week after a wild final day and half of trading at the CME. At mid-day on Thursday, both live and feeder cattle futures markets were liquidating down to monthly lows. By the close on Friday, prices were above where they opened on Monday, retracing almost 4.00 in May Feeders and June live contracts to close near highs for the week. The whippy action was result of a cash market sell off and recovery mid-week. Weighted cash averages for live cattle across the major producing states were in the 134 to 136 range to close the week, up 2.00 from where they were on Wednesday. The choice box beef cutout closed the week off the lows by 1.00 to 215.15, but below last Friday’s close of 222, reflecting weak demand by the end user. Until this gets resolved, funds will be very patient to buy with packer margins in the red. There are no major fundamental reports for livestock other than Tuesday’s WASDE until cattle on Feed and cold storage after the close on Friday. The 7 day average for the feeder cattle index is over 158, almost 3.00 over where the expiring April futures are trading. The index rolls will continue next week until Wednesday, so look for continued volatility in the front of the curve as specs move from April to May.
Fundamental commentary contributed by John Payne (firstname.lastname@example.org)
Live Cattle appear to have seasonally topped out in the near term. Most of the calls for 145 have gone silent. I still feel that the market will challenge the March highs before the spring beef market has concluded. The market has now alleviated the oversold condition, hopefully concluding the selloff. I still view this as a correction to a minor bull market, encapsulated within a major bear market which started in mid-2015. Hedges for LIVE Cattle have been rolled down aggressively, financing or extending the life of the hedge. I recommend letting all hedges work from here forward, in case my analysis is wrong, and would not look to roll down again until we can work a 1:3 or 1:4 ratio. We will be rolling June puts up at a 1:4 or greater ratio if given the chance. A minor bullish seasonal bias starts next week in Live Cattle.
Feeder Cattle have a substantial amount of seasonal upside left to them (May – June). That’s relative to time, not necessarily to price. The need for a corrective pull back has been satisfied. Similar to Live Cattle I view this as a correction to a minor bull market, within a major bear market. A reversal Thursday, and follow through buying Friday gives hope that the correction may be complete. Bear in mind it is quite normal, seasonally, for feeders to sell off some the end of March. To maintain faith in the seasonal we need to see feeders build bullish momentum moving away from the reversal low.
May feeders started the week within their much traveled trading range either side of 155, and with a viable up trend line. Unfortunately, Tuesday brought limit down and Wednesday and Thursday penetrated below the up tend line. Of note, April feeders did not take out last week’s reversal or their uptrend line. The damage in May could have been largely due to the Goldman Roll, as mentioned above. May feeders put in a reversal higher Thursday and after gapping on the open Friday, closed up 2.975 at 152.775. If we can leave this gap open below us, it may be an initiating gap for another try at resistance at 165 and 166. Of course, first we need to get beyond the topside of the recent trading range established around 155 that killed the reversal attempt last week.
Short term trend is neutral. Wednesday penetrated the uptrend line. Friday penetrated the down trend line.
Moving averages have crossed back over to marginally negative. Thursday and Fridays action has started to roll the moving averages back toward positive.
Down Side Targets
Support at 146.65.
142.65 supports is the yearly low. If the market takes out and closes below 142, my mildly bullish attitude will have been confirmed 100% wrong.
Topside Targets (longer term)
I still like the gap at 173 up to major resistance at 184, but the market needs to build bullish momentum, and of course, get through major resistance at 166.
Given the extent of the selloff from resistance at 166, our first goal will be to get back to 166.
All options have been rolled down one time, covering the cost of the hedge. As we are using house money at this time, we will be letting hedges work, and not looking to take profit to the down side until we can work a 1:3 or 1:4 ratio. Thursday we did recommend using some out of the money calls against our then deep in the money puts to protect some value. We did not exceed a 1 call vs 2 puts ratio. This will not protect very much of the put profits, but divided by the number of puts, costs us less than 1.5$ of protection if the market continues lower. Rolling down would have cost us 4$ of protection. We will be rolling puts back up using between 1:4 and 1:6 ratios if given the chance.
May Feeder chart sourced from RJO Vantage 4/8/2016
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