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garry@openinterestanalyst.com

Live Cattle-A Technical Analysis

This research note is our interpretation of technical factors for live cattle and does not address fundamentals and a variety of other elements, which may influence prices. Our goal is to provide context by analyzing price, volume, open interest, moving averages and seasonal influences, all of which may provide insight into future price discovery. Consult your broker or financial advisor before making any decision regarding speculating/hedging. 

Price:

On Friday, April 22, June live cattle made a new contract low of 113.900 and closed at 114.650 down 2.25. [Interestingly, the June 2015 contract bottomed on April 22, 2015 (145.175) then rallied to a high of 154.975 on May 14, 2015.]  The low made Friday was slightly above the April 2012 and May 2012 prints of 112.300 and 112.225 respectively.We think these will be penetrated and the next area of major support is the May and June 2011 lows of 101.625 and 100.750 respectively.We tend to think that May and June 2011 support will likely hold for the following reason: When commodities break through their former all-time highs, those highs become areas of support.

For live cattle, the all time highs made early this century first occurred during October 2003 at 102.925. During March 2007, cattle made a run at the October 2003 high and printed 102.925, the exact high made 3 1/2 years earlier. During 2008, the all-time highs of October 2003 and March 2007 were broken when live cattle made the high of 104.500 in June 2008. During the subsequent three months, live cattle continued to make all-time highs until the final 2008 high (107.050) was made in September. This held until December 2010 when the September 2008 print was taken out with a new all-time high of 108.700.

The lows of May and June 2011 (101.625 and 100.750 respectively) dovetail closely with the previous all-time highs of 102.925 made during October 2003 and March 2007. We think there is a high likelihood the October 2003 and March 2007 highs and the May and June 2011 lows will provide support to live cattle (100.750 – 102.925) 

Volume:

Volume traded in Friday’s debacle was 66,995 contracts and exceeded the volume traded on April 18 of 64,620 when the June contract closed down the 3.00 cent limit. The highest volume for 2016 occurred on March 11 when 85,517 contracts were traded and the June contract closed up 92.5 points. The second-highest volume of 2016 occurred on March 31 when the June contract advanced 95 points on volume of 77,986 contracts. Note: the two highest-volume days for 2016 occurred when prices advanced.

According to the exchange, average daily volume year to date has been 53,627 and average daily volume for March was 53,972. On April 18 and 22 when the the June contract was making new lows for the move, volume on those two days was only about 25% above YTD average daily volume. From April 11 when the June contract closed at 123.225 through April 22 (close 114.650), the June contract lost 8.575, and average daily volume for the 10 day time frame was 47,681 contracts, approximately 11% below the average daily volume year to date.

We bring this to your attention because volume is an important indicator of market participation and is a measurement of fear/euphoria/complacency. Thus far, volume on the decline after the June contract topped on March 17 (close 130.700) has been muted considering the magnitude of the move thru April 22 of -16.050, or -12.25%.

In our view, for live cattle to begin the bottoming process, the market has to experience high volume days on price declines that it had when prices advanced. Though the decline of the past month has been precipitous, the relatively low volume on ever lower prices confirms a high degree of complacency.

Open Interest Analysis: March 17, 2016-April 22

According to preliminary stats published by the exchange, total open interest in live cattle on Friday declined by 3,765 contracts, which relative to volume is approximately 120% above average, meaning that liquidation was heavy on the decline. It should be noted that preliminary open interest stats are unreliable and can change substantially in the final report. Most important: the April contract lost 1,942 as it nears expiration and therefore, approximately half of Friday’s total open interest decline can be attributed to the April contract. If 1,942 is subtracted from the total of 3,765, open interest for liquid contracts declined at just an average pace. Again, this confirms the complacency of market participants even as new contract lows were being made in a number of delivery months.

We took a deeper look at open interest stats from March 17 through April 22, and again found more complacency. For example, on March 17, total open interest stood at 297,231 contracts and by April 22 fell to 280,120 according to the preliminary stats. In other words, during the 12.25%  price decline from mid March through April 22 total open interest declined by only 17,111 contracts, or -5.75%. Normally, on a decline of this magnitude, a much larger open interest loss would be expected. However, a more likely outcome when prices are nearing multi-year lows would be to see open interest increase. 

Commitment Of Traders:

The Commitment Of Traders report released on Friday confirms our thesis about the complacency of speculators. The report (futures only) revealed that managed money remains long live cattle by a ratio of 1.69:1, although this is down from the previous week of 1.80:1 and the ratio two weeks ago of 2.14:1. Three weeks ago, managed money was long live cattle by a ratio of 2.82:1. 

Remarkably, in the current report, managed money added 1,669 to new long positions and increased their short positions by 1,463. From the COT report tabulation date on April 12 to the April 19 report, the June contract lost 4.275, yet managed money increased their net long position by 206 contracts. This leaves managed money holding total longs of 62,021 and a net long position of  25,311.

Futures contracts held by managed money are underwater and a hefty portion will be forced to liquidate before the market can undergo a turnaround in our opinion. The lopsided long position will continue to provide fuel to the downside and will keep prices on the defensive. In addition, speculators holding losing positions will likely want to liquidate these on any rally, which should keep a lid on advances, at least in the short term. The first major indicator that a bottom is near is when managed money assumes a net short position.

Moving Average Set-Up:

The moving average configuration for live cattle is distinctly bearish. For example the 50 day moving average of 124.188 for the June contract is below the 200 day moving average of 128.573. What’s worse: the weekly moving averages are in a bearish set up with the 50 week moving average on the continuation chart standing at 138.259, 150 week, 142.973 and the 200 week  trading at 138.408. This confirms the trend is down longer term.

For this to begin to change, the nearby cattle contract would have to trade above the 200 day moving average (128.573) for at least 50 days before the daily moving average set up would turn from bearish to bullish. For the weekly moving averages, the nearby cattle contract would need to trade above the 200 week (138.408) moving average for at least 50 weeks to turn the weekly moving averages into a bullish set up.

Seasonal Considerations:

Although performance thus far in April has been abysmal, (down a tad more than 6% thru April 22 ) it is not the worst of the past two decades. During April 1996, the June contract lost 8.25% and at the low (54.00) made on April 26, 1996, the June contract was down 13.5% for the month, but rebounded to close at 57.350 on April 30.

We examined the performance for May 1996 to see if the downtrend of April 1996 continued and and the opposite occurred. The June contract rallied strongly from the April 30, 1996 close of 57.350  to the May 31 close of 61.675, a gain of approximately 7.5%. 

May is just around the corner and it is the worst-performing month on average, down an average of 4.1% for the past 20 years. The worst of the 20 occurred in 2011 when the June contract declined from the April 29, 2011 close of 113.350 to the May 31 close of 103.750, down 8.5%. However, during April 2011, the June contract lost 6.25%, bringing the loss for April and May 2011 to 14.75%.

Live cattle tends to bottom around mid May and then enters it strong seasonal pattern, which lasts from June through October. The average gain for June is 1.1%, July +1.3%, August +1.6%, September +2.1% and October +2.1%.