This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on Monday May 23, 2016.
Cattle fundamentals were pretty steady over the past week as choice and select cutouts have maintained values relative to where they were 2 months ago. Choice sits right in the mid 220’s while select trades around 210. Cash reports of trade late last week in Kansas in the 132-134 area would also be relatively quiet relative to the past few months of trade. Unfortunately for the bulls, futures markets were been increasingly negative as we approached Cattle on Feed reports on Friday. Here are the results:
- Total Cattle on Feed – 101% of last year (on expectations)
- Total Cattle Placed in Feedlots- 107% of last year (above expectations)
- Total Cattle Marketed- 101% of last year (below expectations)
Fundamental commentary contributed by John Payne (firstname.lastname@example.org)
Live Cattle: I still am hopeful that the market will make a run at the March highs before the spring beef market has concluded. The market is trying to decide if the rally off of the contract lows is corrective, or the start of something bigger. Over the last couple of weeks June Live cattle has developed a channel pattern(flag). Generally speaking, when a market breaks out of a channel, it indicates the start of another leg in the move, direction to be determined by the breakout. We will be watching closely next week for a break out. With what appears to be a surprisingly bearish Cattle on Feed report Friday, one would expect the market to break out lower. Most of the purchasing for Memorial Day has concluded. We are working orders to roll 119 puts up at ratios between 1:4 and 1:6. It does not appear likely that we will have the opportunity to roll the 119 June Live puts up in the near future. Monday’s action will be monitored closely to determine how aggressive we may want to roll the 119 puts down. As the 119 puts were paid for with the original 126 put profits, it would be reasonable to assume a passive approach when rolling them down.
Feeder Cattle have a good amount of seasonal upside left to them (May – June). That’s relative to time, not necessarily to price.
August feeders – As June Live cattle was developing a channel pattern, August feeders where busy establishing a wedge pattern. The implications of both patterns is the same, the direction of the break out can be significant in determining market direction. Going into Friday I felt quite confident that the most probable move was a breakout to the upside. Given Friday’s surprisingly bearish Cattle on Feed, one could assume the breakout will be to the bottom side. The 50 day Moving average that initially turned the rally off the April lows, remains unchallenged. Technically and seasonally, there is a solid argument that Feeders have established the spring lows, with beef’s best months directly in front of us. At this time the market has not confirmed that, but establishing an up-trend line and penetrating top side resistance at 157 would certainly add credibility. Friday’s Cattle on Feed will probably test that theory right quick, proving it correct, or discarding it like all other bullish thoughts so far this year.
Short term trend is neutral.
Moving averages are still negative, but the 10 day has rolled over and is pointed higher.
Down Side Targets (May)
138.575 is the yearly low established 4/29/2016
The next level of support sits in the low 130s, established in 2012 and 2013.
Topside Targets (August)
I still am childishly hopeful for the gap at 174 up to the October high at 184. This appears to be a long shot, but I am still hopeful. I will definitely be losing some hedge money before we get to that level. If we make new yearly lows coming out of Friday’s Cattle on Feed, I will officially abandon this hope.
Given the extent of the selloff from resistance at 164, our first goal will be to get back to minor resistance at 156 and then major resistance at 166.
With May hedges in Place
With May calls working against May Puts already in place, this position has very little risk, with additional profit potential if the market extends below the call strike price. I will be leaving my May position on. May is tied to the cash this close to expiration so August may sell off much faster than May. We cannot lose the May/Aug spread and maintain protection with puts in May. Because of that, if Aug takes out the bottom of the wedge I am going to buy the necessary puts in August. At that time, I would have calls leveraged against puts in the May, and puts in August. The negative aspect to this strategy is that you have to finance the August puts until no later than May 26, when May options expire (maybe sooner depending on what May does). No matter what, you will end up with the difference between the May call and the May put to offset the cost of the Aug put, less commission and fees.
Contact one of the listed Daniels Trading brokers below for ideas on where to initiate hedges if your 2016 production is not already covered .
August Feeder chart sourced from RJO Vantage 5/20/2016
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