No Bullish Stampede To Cattle Futures

Fundamentals

Although Live Cattle futures prices have been choppy lately, there is little doubt that the longer-term trend has favored the bears, as prices have been in a steady decline since key support at 87.15 in the December futures was taken out in the final days of August. However, optimism that the worst of the economic malaise is now behind us, and Cattle prices have staged a bit of a rally the past few sessions, with traders starting to anticipate an improvement in consumer sentiment. This may, in turn, lead to an increase in demand for more costly food items such as beef. However, any shift in consumer demand may take some time, and current supplies of fed Cattle remain ample. Friday’s release of the monthly Cattle on Feed report (COF) was viewed as uneventful, with total Cattle on feed as of October 1st estimated at 10.474 million head, or 101% of last year’s total. Placements in September totaled 2.388 million head, or 105% of last year’s total. Cattle marketed in September totaled 1.746 million head, which is 96% of last year’s total. The totals all were within the average range of pre-report estimates by analysts and traders. Cattle sales have been light the past week, with most transactions occurring between $78 and $82 per hundredweight, as activity was muted ahead of Friday’s COF report.

Trading Ideas

Although current Cattle fundamentals favor the bear camp, there is still growing optimism that signs of an economic recovery will eventually spur beef demand and, in turn, increase Cattle prices. These conflicting views may lead to a period of price consolidation until either bulls or bears regain the upper hand. One option strategy that would benefit from a sideways market would be selling strangles. A short strangle involves the selling of a call option and a put option at different strikes but for the same trading month. An example of this trade would be selling a December Cattle 88 call and a December Cattle 82 put. With December Cattle trading at 85.175 as of this writing, this trade could be done for a 1.25 point credit, or $500 per strangle, not including commissions. These strikes were selected because the call strike is above near-term resistance at 86.50, and the put strike is below near-term support at 83.40. Given the potential unlimited risk involved in selling strangles, those who choose to trade using this type of strategy should monitor their position extremely carefully. More risk averse traders may choose to close out the position before expiration should December Cattle trade above 88.00 or below 82.00 before the options expire on December 4th.

Technicals

Looking at the daily chart for December Cattle, we notice the recent move up off the contract lows pulled prices above the 20-day moving average, which is considered a short-term positive for Cattle prices. However, momentum traders have had difficulty keeping the rally going, which may be a sign that the rally was due to short-covering buying rather than new longs entering the market. This could be especially true given the COF report on Friday, which spurs some position squaring by traders ahead of a major report release. The 100-day moving average is currently found near the 87.80 area, and it would take a weekly close above this indicator to put the bulls firmly in control. The 14-day RSI is in neutral territory, with a current reading of 47.70. The October 1st highs of 86.50 remain near-term resistance in the December contract, with support found at the contract low of 83.40.

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