I don't write about cattle often, but it looks like cattle are poised to make a run at the previous high of $134. This target is based off the measuring height of the cup and handle pattern which is about $15. From $119, another $15 would take price to $134.....the previous contract high. At that point, you should be prepared to protect price with some options or LRP. I expect this will be around the end of the year when price reaches that level.......maybe January.
Feeder Cattle are filling a gap today which was left in April last year. The sell off last month cooled sentiment and reset the overbought conditions which has allowed the market to roll higher.
While the optix is approaching excessive optimistic levels, I do believe there could be room to make one more push higher to the next target near $170 before exhaustion occurs.
Its pick your poison time. An option strategy here would set a nice floor yet still allow you an opportunity to sell at a price level $10.00 higher than where we are today. These levels can disappear very quickly.
Cattle came within a nickel of the $151 target I pointed out last week. Most of the time, a top will be met over a period of 2-3 days or with some sort of blow off top. I expect this rally still has a day or two left consolidating around the $151 target.
The CCI oscillator in the chart above will make a sell signal when it crosses back below 200. That will happen any day. Sentiment readings are now well into excessive optimism levels, which means the market is running out of buyers.
All the conditions are met for prices to decline for a few weeks to allow a re-set of sentiment. I am not saying prices won't be higher by the end of the summer, but they may not be. Setting a floor here makes sense. Options and LRP will still allow you to capture a higher price later should that happen. This is the best way I know to manage your price risk.
Like I suggested last week would happen, the gap that was left late last summer has been filled. Gaps often mark turning points, but as you can see in the chart below, price has blown on through the gap following two up limit days. Looking ahead, there are two targets I can see. The first target is at $151 from last August's high which looks likely to be hit. The second target is much more pie in the sky from a gap which was left over a year ago at $161. These are actionable places where it makes sense to consider protecting your futures price.
The CCI is not the best gauge to follow with cattle, but if price reaches $151 its likely to trigger a sell signal on the CCI. The other metric to consider is sentiment. Sentiment Trader pegs trader optix at 75 which is the highest level since November of 2014.
The bottom line is that this rally is getting long in the tooth and will need to either trend sideways or lower for a while to burn off excessively bullish sentiment to get more buyers interested in entering the market. If we are at an intermediate cycle top, this means we will likely have lower prices for the next 2 months. This would be long enough for prices to come back to the 200 day moving average before its next advance.
Again, you can protect these price levels using LRP insurance, or buying puts or bear put spreads which are not marginal.
I was looking at the Feeder Cattle contract for a friend today. Cattle has enjoyed a tremendous rally this year. Today, prices began entering a gap that was left last summer. I would expect this gap to fill but those are often turning points. If you have some feeders you would like to get priced, now would be a good time to look at a put option, a bear put spread, or an LRP insurance policy.
When prices reach an extreme, our human nature kicks in. Fear and Greed drives any market, and when it comes to the markets, it usually drives us to the wrong conclusions. Large speculators know this, and use this against us.
I have been asked a few times lately about hedging cattle. I have always promoted hedging cattle, but not at bottoms. The problem is that when prices are high, most farmers don't wish to spend the money to hedge because everything is fine. Their greed kicks in because prices are expected to remain high forever. When prices look like they are going to zero, everybody wants to know how to put in a floor. I doubt I would be having conversations about hedging cattle if farmers were not feeling bearish. THAT is a good sign that a bottom is in!
EVERY strong rally comes when sentiment reaches extreme levels, and cattle are at an extreme. The chart below shows we have extreme bearish levels. Insurance is easier for me to sell to people when there is extreme bearish sentiment.......when the blue line on the sub-graph is below the green dotted line on the chart below. I can hardly give it away when the blue line is above the red dotted line, and that is when everybody needs to be buying this protection.
Hedging cattle with prices stretched this far below the 200 day moving average and sentiment this low is not managing risk. It could be locking in a loss, but it is definitely limiting the upside.