Running With The Bulls

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Earlier this month, we discussed our outlook for a post-harvest rally, highlighting corn and soybean oil contracts. 

Here’s what we had to say: 

Cotton and coffee continue to rip. Crude oil and the energy space are grinding higher. Live cattle are breaking out. Even precious metals are starting to catch a bid.

Fast forward to today, and Ags have emerged as the clear leaders over the near term. They’ve been ripping higher while the majority of the commodity space retests critical levels of former resistance and continues to consolidate.

The fact that grains, softs, and livestock are marching higher while their peers are under pressure, tells us this is an area we should focus on for long opportunities. It’s where the relative strength is right now.

When we drill into the ag space, cattle futures continue to stand out. Not only are these some of the stronger contracts in the subgroup -- they are also resolving higher from significant multi-year bases.

And you already know how we feel about big bases… Let’s talk about ‘em!

This is a weekly chart of Live Cattle futures:

In early August, we pointed out that live cattle futures were just a few ticks away from absorbing all the overhead supply ~130. What appeared to be a breakout later that month quickly turned into a whipsaw as price continued to churn below our risk level.

It turns out the bulls just needed a little more time. 

Price has rocketed higher recently and is already about halfway to our target. If we’re not in the trade by now, we can always look for a short-duration continuation pattern.

We’ll keep you posted on any flag or pennant formations that could offer a well-defined entry with a risk/reward skewed in our favor.

At the end of the day, as long as live cattle futures are above 130, the bias is higher and we’re targeting 151 over the next 1-3 months.

Next, we have a chart of Feeder Cattle:

While live cattle produced a whipsaw last summer, feeder cattle futures handed us a premature breakout. Indecisive price action and false moves at a breakout level can make re-entry into a market difficult. But based on the past two weeks, both feeder and live cattle appear poised for sustained upside moves.

We think the chart of live cattle is a good indication of where feeder cattle is likely headed in the coming weeks and months.

We want to be buying these base breakouts. We’re long feeder cattle above 158 with a 2-4 month target of 192. 

As always, It’s important to adhere to strict risk management protocols. It’s especially critical when price action is sloppy, as it has been for cattle. If this is just another false start, we’re out. We don’t want to be caught holding a long position in feeder cattle below 158.

We’ll continue to update you on opportunities in cattle futures along with other Ags and the rest of the commodity space.

Stay tuned!

COT Heatmap Highlights

Author's Note: The CFTC did not publish new COT data this week due to Thanksgiving Day. We’ll have updated data next week!

• Minneapolis Wheat: Commercial hedgers have finally lightened up their shorts, but those contracts remain near record levels.
• Cotton: Commercials added almost 3,000 contracts to an already heavy short position this week. 
• US 10-year Treasury Note: Commercial hedgers continue to carry a net long position less than 10% away from its three-year record. 
• Coffee: Commercial short positioning is just 2,000 contracts shy of its three-year extreme.

Thanks for reading!

Let us know what you think. We love hearing from you.

And be sure to download this week’s Commodity Report below!