This is a sample entry from Andrew Pawielski’s email newsletter, Market Dimensions Advisory, published on November 11, 2015.
For the past couple of weeks, we have seen an extremely strong sell off in the meat commodity sector – Live Cattle, Feeder Cattle and Hogs. Overall, it has been a bearish trend for these contracts in 2015, but we have seen limit down moves in these markets off and on for almost a week straight. This is what I would classify as an extreme move and a market shift. What started out as rumors of a commodity firm being forced to liquidate positions, driving the market limit down, now looks like a confirmation of fundamental change in price. There are many factors at play in this market, some technical but mainly fundamental such as a stronger dollar, previously inflated prices and very tight cash market right now.
Let’s take a look specifically at Live Cattle. Live Cattle futures have basically been in an uptrend since 2009, trading around $80 per contract (40k lbs) and seemed to peak about a year ago with Oct/Nov 2014 making record contract highs trading at $171 a contract. Over the course of 2015, we have seen a shift in the trend turning from bullish to bearish. We just recently saw prices at the end of Sept 2015 at $120. This is a market correction of roughly 30% on the year in this contract.
In October 2015, we did catch some support and saw the Dec Cattle contract trade from $128.00 to $144.725 on October 29th. That is when the selloff started. With us now breaking previous lows at $127.425, we have essentially touched limit down in this market almost the last 5 days.
When we have such a sharp selloff in a market, I think the initial knee jerk reaction is to buy, as many are conditioned to think “buy the dip” or I missed the initial sale and am afraid to sell a contract that has sold off already. The market participants who do buy and try to pick bottoms and are wrong only exacerbate the sell off as they are being forced to liquidate sell orders at market and that pushes the market down faster and harder. It is often, when you see a momentum move, there can at times be a pause or small showing of support and then followed by an even sharper move. So in the cattle market, I am hesitant to want to buy for a run back up to recent high prices. However, you are forced to ask yourself questions when wanting to participate in this market. How much lower can we actually go? Will the cash side of this market cause us to have just of a quick run back up? (With the low volume in cattle this is quite the possibility). If these new late shorts get trapped and create a buying frenzy, could we get caught?
This is where the difficulty of trading comes in, and you need to lean on your experiences in other markets or use stronger risk management approaches. Perhaps trading the flat price futures may not be your best option in a market experiencing these type of moves, but volatility creates opportunity and that is what we want in markets. If you feel the selloff is too sharp and not sustainable, we can use options to buy calls. If you think we have more room to run lower, we can look to sell a Live Cattle futures spread to offset some of the flat price risk. With volatile markets I like to spread off some of the risk.
Below is a Daily chart of the Feb16 vs June16 Live Cattle spread. As you can see, our low now is right in line with the lows and consolidation we had back in late July. We have slightly bounced off these prices, but I am looking for us to trade through that and test the previously $7.00 lows we saw in the beginning of October and ultimately break the $6.75 lows from mid-May.
For those who would like to discuss my specific entry of this trade, please reach out to me directly, and we can discuss what entry, stop, number of contracts and target will be best for you based on your risk profile.
If you would like to follow along with more of my trade ideas or know what I am watching in the markets I encourage you to sign up for my free trading advisory, Market Dimensions Advisory, below.
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