Non-Correlated Short Setup In Live Cattle

With every global equity market down to start 2016 and media outlets declaring “Markets In Turmoil”, it can seem like there are no opportunities to make money in this environment. While it may be true that it’s difficult to press shorts while stocks are extended in the short-term, and even more difficult to try to make money on the long side until global markets stabilize for a few days, as market participants we can look at all liquid asset classes around the globe for opportunity.

With that being said, Live Cattle Futures are a non-correlated asset that look interesting on the short side.

From an structural perspective, Live Cattle Futures broke their uptrend line from the 2009 lows in July, retested that level in August, and have been falling ever since. This market became extended to the downside in the short-term late last year and experienced some mean reversion, but have since run into the downtrend line from the June lows, as well as prior support / resistance from the 2012 highs and 2014 lows. With momentum in a bearish range and the 200 week moving average beginning to roll over, the weight of evidence continues to suggest this is a market we want to be fading on strength.

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The contract adjusted daily chart shows prices recently testing the 38.2% retracement of the June-December decline, which corresponded with the downtrend line from the September highs. Prices flagged for eight sessions in a tight range, but resolved to the downside today. In my experience when bullish consolidation patterns resolve to the downside, it’s often the start of an aggressive move to the downside. Prices below a downward sloping 200 day and momentum in a bearish range, combined with the bearish picture structurally, creates a weight of evidence that suggests fading this move as long as prices remain below this downtrend line on a closing basis. Additionally, the recent mean reversion has allowed public sentiment to retrace from pessimistic extremes not seen since 2009, back into more neutral territory.

There will likely be some support along the way, but this move should target the 161.8% extension of the December-January rally into resistance, which takes prices to the 2013 lows near 112, representing roughly 16% downside from current levels. With a correlation of -0.1, 0.04, and 0.38 with the S&P 500 over the last month, quarter, and year respectively, this may be an opportunity worth exploring until there is better risk/reward in the global equity markets.

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The Bottom Line: During times like this, noise-makers are going to be louder than ever, but don’t let it distract you from opportunities to make money in the market. If you’re looking for a non-correlated trade on the short side, Live Cattle Futures might just fit the bill. The recent rally in prices toward resistance, combined with today’s breakdown presents a short entry where the risk is well-defined and the risk/reward is at an acceptable level.

Despite seasonality for Cattle related futures in aggregate leaning positive during the first two months of the year, returning 1.5% and 2.2% on average over the past thirty years respectively, the rest of the evidence supports trading to the short side of this market despite the potential headwind.

The thesis remains intact as long as prices remain below the downtrend line from the September highs and last week’s highs near 138 on a closing basis. Best of all, you don’t have to worry about what the S&P 500 or Shanghai Composite is doing to take advantage of this market.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can @Brunicharting


JC here – I have to tell you, I’ve always been a huge fan of Tom Bruni and I couldn’t be happier to have him writing a guest post for me.

I think this was a great post and all that I would add is that there is a potential bullish divergence at the December lows. The fact that RSI was unable to hit overbought conditions on the recent rally suggests to me that there is a high probability of this divergence failing and much lower lows are likely coming soon. I would keep fading any strength in cattle.

The author does not have a position in the mentioned securities at the time of publication. 

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This post originally appeared on on 01/08/2016. 

Non-Correlated Short Setup In Live Cattle