This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on Friday June 17, 2016.
Weekly Cattle Commentary 6/17/2016
Live Cattle: As the 4th of July is just a few weeks away I have given up hope that the market will make a seasonal run at the March highs. Currently I am longing for futures in the 120s with a positive $10 basis, both of which seemed to vanish last week. The Live Cattle market still has not confirmed if the rally off of the contract lows is corrective, or the establishment of a bottom and the start of something bigger. Last week’s action makes it appear extremely weak. The market closed limit down Monday and by Thursday, took out the nearest established support at 116.45. With another wedge break out lower I would expect the 114 lows to be tested this week. We let the 119 June puts expire worthless, hopefully June cash sales have been completed, taking advantage of the once positive basis plus remaining profits from the original 126 puts. We will be watching our existing August Live Cattle puts as the math works closer to being able to roll them down, potentially 1:3 or 1:4, will keep you posted.
Feeder Cattle have a good amount of seasonal upside left to them (June-technically out to August but in my opinion less reliable after the 4th of July). That’s relative to time, not necessarily to price. As of today, Feeders are moving counter seasonal, at least for now.
August Feeders: Monday (6/13) August feeders closed limit down. By Wednesday they broke down and out of another major wedge established off of yearly lows. Thursday saw the failure of the 138.10 yearly lows. The original wedge sell signal (in orange) and 50 day moving average still remain as negative factors. In addition to a major wedge failure (in red) and yearly low penetration. Last week I stated “Failure to gain any upside momentum followed by a potential major break out lower would not leave one feeling all that bullish.” Presently we find ourselves in exactly that position. Wedge breakout projects downside targets of 133, with 2013 support sitting around 131.5.
Short term trend is Negative.
Moving averages are negative.
Down Side Targets
The next level of support sits in the low 130s, established in 2012 and 2013.
The nearest top side resistance sits at 148.5. I will want to see that penetrated before I worry about the next higher level.
In the Money May hedges were exercised at expiration on May 26
We recommended purchasing August puts on a downside breakout of a minor wedge. Unfortunately, we gapped out of that wedge (in orange on the chart) and our fill was not as good as one would hope. I ended up buying 141 August puts for 5$ on the open Monday (5/23). On 5/31 we rolled 141 puts up to 144 puts, utilizing the aggressive 1:3 ratio mentioned in this letter. Superior Video had Montana’s first big auction sale for fall delivery calves. The cash basis was much weaker than I was expecting or hoping for, coming in at about plus $6 on a 625lb calf. I begrudgingly accepted that as an established fact, and forward contracted ¾ of my 2016 production after the video auction. For clients not forward contracted, I would continue to leverage the protection offered from the 144 puts. We will be working the math on rolling the 144s down with futures around 132/134.
Mr. Payne has mentioned several times that the cattle market is overweight with shorts. He is absolutely correct and at some point that fact will cause a violent correction higher as all the shorts try to exit at the same time. However, timing the exact moment the short trap is triggered can be perilous and very frustrating. Out of respect for that day coming, I will be looking to re-own my recently sold production with calls. Unfortunately, nothing makes me want to re-own them today and my lack of confidence will have me not wanting to spend very much.
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 6/17/2016
August Feeder continuation chart sourced from RJO Vantage 6/17/2016
June Live chart sourced from RJO Vantage 6/17/2016
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