This is a sample entry from Craig Turner’s email newsletter, Turner’s Take, published on October 02, 2014.
The February 15 vs Dec 14 Live Cattle spread is on my radar again. The contracts are trading at about even but cash prices forecasts suggest February should be trading $2.00 over December. This has come in quite a bit from the $5.00 projected cash difference we talked about two weeks ago, but seasonally February does trade over December most years in the futures market.
From a charting perspective, the futures spread looks more bearish than the outrights. I think this is important to note. We saw this same price action in Crude Oil a while ago and did very well with a bear spread in crude because of it. If you remember, the outrights were making higher highs but the spreads were making lower highs. When crude ran out of steam the futures spreads came in significantly.
Please see the three daily charts below for Live Cattle. Notice how both December 14 and February 15 are making new highs. Then take a look at the third chart. The Dec/Feb spread is not making new highs. It is making lower highs.
What does that mean? In my opinion, it is sign we are coming to a top in Live Cattle sooner rather than later. A sign of a healthy bull market is the near months leading the deferred months on the charts, and the spread market should look bullish on the charts the same way as the outright futures (this is why we always, always, always chart calendar spreads “front month – back month” regardless if you are short the front month or long the front month). It also tells me that if you want to get short the Live Cattle market, I would rather be bear spread futures than outright short. If you are short and wrong in LC, it can get ugly very fast. If you are short and wrong in the Dec/Feb LC spread, you know you need to get out when you break that red trend line on the chart and the risk should only be about $600 to $800 per spread.
This bear spread was also flagged by MRCI for September and October, and if you are an MRCI subscriber you can find the Feb 15/Dec 14 Live Cattle page here: http://www.mrci.com/client/spreads/strat/s4154.php
I am not ready to short Live Cattle or get into this bear spread right now, but it is on my radar and if given the right opportunity, we will be looking to bear spread Cattle at some point in the near future.
Dec 14 LC Daily Chart
Feb 15 LC Daily Chart
Dec14/Feb15 Daily Chart
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