From the desk of Tom Bruni @BruniCharting
Strength across the commodities complex has been a significant theme throughout 2016, but Feeder Cattle has not participated to the upside at all this year. It currently sits at near 3 year lows and is down 15% for the year, but recent price action suggests this market could be setting up for a monster squeeze to the upside.
Structurally, prices have been stuck in the 145-170 range since breaking the uptrend line from the November 2009 lows. Last week prices made new marginal lows as momentum diverged positively. If this sharp reversal back above the December lows holds until the end of the week, it would confirm that bullish divergence and failed breakdown from a structural perspective. The upside target for this potential move would be the YTD highs near 170.
Normally we want to avoid markets with flat 200 period moving averages, but in this case we can utilize the failed moves that result from them to our advantage. As long as prices are above the December lows on a weekly closing basis, we want to be approaching this market from the long side.
The daily chart provides a more tactical view of this failed breakdown. Prices closed back above the downtrend line from the early April highs and the December lows to confirm the bullish momentum divergence and failed breakdown. Tactically we want to be long this market only if prices remain above this confluence of resistance on a daily closing basis and want to be taking profits near 170.
Seasonality: It’s worth noting that these potentially bullish developments are occurring as prices enter what’s seasonally their strongest 3 month period of the year (May-July). If prices follow-through after this initial reversal, seasonal tailwinds could help prices really accelerate to the upside.
The Bottom Line: With prices roughly 20% below their 200 day moving average, the potential for mean reversion in this market is high and the risk is well-defined. We only want to be long this market if we’re above the December lows and want to be taking profits at the YTD highs which correspond with the 200 day moving average near 170.
I think a monster squeeze is ahead and a strong weekly close would add to my conviction.
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’m definitely with Bruni on this one. For you guys who know me well, this trade has “JC” written all over it: 1) No one is talking about it 2) momentum is diverging positively on both weekly and daily timeframes and 3) the risk is extremely well-defined. Most importantly, the profit potential more than justifies the risk in this trade. Great catch Bruni!
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