Technically Speaking

The February live cattle contract established a secondary (intermediate-term) downtrend with its bearish key reversal the week of October 13. The contract then consolidated for a period of four weeks, before last week's meltdown led to a test of initial technical price support near $131.10, the 38.2% retracement level of the previous uptrend from $124.025 through the high of $135.45 (week of October 13).

This week has seen the contract stabilize, holding above last week's low of $131.25, yet unable to establish a strong rally. As the contract's weekly chart shows, the next move should be down as weekly stochastics (bottom study) remain bearish. Notice that stochastics established a bearish crossover (the faster moving blue line crossing below the slower moving red line above the overbought level of 80%) in conjunction with the bearish key reversal. This would imply that while the contract could see periods of consolidation, the trend won't turn up again until stochastics fall below the oversold level of 20%.

What will be the likely catalyst to drive the market down? Fundamentally the live cattle market remains bullish, as indicated by the strength of the February to April futures spread (not shown). Comparing this spread to its five-year numbers, the February contract is holding at its strongest level versus the April for this time of year. This would confirm the projected tight supplies in USDA's monthly Cattle on Feed reports.

So if the pressure isn't expected to come from commercial side, noncommercial selling will likely push the market down. Weekly CFTC Commitments of Traders reports show this group decreasing their net-long futures position from its high of 67,836 contracts (week of November 4) to 65,491 contracts (through the week ending November 19). While the bullish fundamentals should keep this group from moving to a net-short futures position, it is possible further liquidation could be seen in the weeks ahead.

This structure (bullish fundamentals, long-liquidation by noncommercial traders) puts the price target near $129.75, the 50% percent level of the previous uptrend. Normally, bullish futures spreads limit a sell-off to the 33% to 50% range before noncommercial buying interest is reignited.

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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.