Technically Speaking

One of the growing concerns in commodities is the disconnection between market direction (trend) and market fundamentals (supply and demand). One of the most discussed is soybeans, where the strengthening inverse in the old-crop forward curve (series of futures spreads from May through August) reflects an increasingly bullish commercial outlook yet the futures market continues to struggle maintaining buying enthusiasm.

Another less-hyped market is live cattle. For months placements have been low, meaning fewer head on feed and tighter supplies as we move into the traditional grilling seasons of spring and summer. Emphasizing that point has been the bullish action in futures spreads, going back to at least the April contract's price relationship with the June and now the June in relation to the August contract. A look at the five-year chart for the latter spread (not shown) shows the 2013 edition trading near the five-year high, reflecting continued concern over supply and demand throughout the summer.

Yet as the weekly chart for the June live cattle chart shows (top chart), the contract remains in a solid downtrend. So much so that this week has seen the June contract post a new low of $119.375. Notice that this low is a test of support at $118.94, a price that marks the 67% retracement level of the previous uptrend from $111.175 (week of April 23, 2012) through the high of $134.50 (week of December 17, 2012).

This chart shows a number of technical developments in June live cattle.
First, after posting the previously mentioned high the contract consolidated before establishing a double-top formation the week of January 14, 2013. This week saw June live cattle hit a peak of $134.425 before moving below the previous week's low and closing lower for the week. In other words, establishing a bearish reversal confirming the idea the top was in the market.

And if that wasn't enough, the interim between the double-top peaks saw weekly stochastics (second study) establish a bearish crossover (week of December 31, 2012) with the faster moving blue line crossing below the slower moving red line with both above the overbought level of 80%. This too indicates the trend of the contract had turned down.

Also notice that the noncommercial net-futures position (bottom study, long futures minus short futures pulled from weekly CFTC Commitments of Traders report) shows the reason why live cattle have been in a downtrend while fundamentals remain bullish. The week of January 7, 2013 saw the position peak at a +49,306 contracts (more longs than shorts) before declining to a low of -10,639 contracts the week of April 1, 2013. However, last Friday's report showed the position switch back to a +2,964, possibly hinting at renewed buying interest by noncommercial traders.

If the contract begins to stabilize, and possibly close this week near its weekly high (whatever that turns out to be, weekly stochastics could move toward the establishment of a bullish crossover signaling an upward change in momentum. If so an uptrend could soon develop, driven by continued noncommercial buying, resulting in a possible test of resistance at set retracement levels.

Another look at the weekly chart shows initial resistance near $124.40, the 33% retracement of the recent downtrend, and a level near the low end of a recently established price gap (area where no trade occurred) between the low of $124.64 (week of March 18) and the high of $124.55 (week of April 1). Given the bullish June to August futures spread though, the June contract should be able to retrace 50% to 67%, putting the longer-term target between $126.90 and $129.50.

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