Live Cattle Spread Points to Lower Prices

We are short April Live Cattle with a 138.0 April Put option we purchased back on 2/5/14 for $600 which expires on 4/4/14.  That doesn’t give us much time left to be ‘in the money’ with this option (or to execute the option and be short April Live Cattle from 138.0).  See our previous post:  Shorting Live Cattle Futures for details.

Looking at the Daily April and June Live Cattle Futures charts below, you can see that yesterday’s prices closed at 144.425 for the April contract, but closed at 136.20 for the June contract.  This indicates  that prices will be lower in the near future.  If the April Futures contract prices catch up (or down, as the case may be) to the June Futures prices our 138.0 Put option will be in the money and we may yet make some money on this trade.  Only time will tell.  Stay tuned.

April Live CattleJune Live Cattle

Shorting Live Cattle Futures

Live Cattle Futures have hit historic highs.  Yes, we know the fundamentals:  Cattle ranchers have been cutting their head counts in recent years due to dropping demand and now there is a shortage of live cattle, hence the spike in prices.  In fact, there hasn’t been this few heads of cattle since the 1950s!

Despite all that, we don’t trade on fundamentals and looking at the technicals in the Daily and Weekly Live Cattle Futures charts below, you can see how the current prices are unprecedented.  What goes up must come down, at least correcting to the 50% level.  Therefore, with the 1-2-3 Top Formation shown in the April 2014 Live Cattle chart below, we have shorted the Live Cattle Futures market when prices broke below the #2 point of 139.45.  We purchased a 138.0 April Put option for $600.00 which expires 4/4/2014.

On the Daily Live Cattle chart below, the 50% Retracement is 137.64, which is why we bought the 138.0 Put Option, in case we are limited on the downside by this retracement level.  HOWEVER, on the Weekly Live Cattle chart (below) the 50% Retracement is 133.26 which gives us great downside profit potential.

Daily Live Cattle - April 2014Weekly Live Cattle

Live Cattle Makes New Multiyear High

We had been watching the Live Cattle Futures market after seeing a 1-2-3 top formation develop over the period of a few weeks.  Now, Live Cattle Futures have hit a record high (see Daily Live Cattle chart below).  The fundamentals for Live Cattle are that ranchers have far less heads of cattle than historically because the demand for beef has dropped.  Therefore, they have shrunk their herds to accommodate market demand.  This is driving the price of Live Cattle Futures to new highs.  But prices won’t rise forever, and now that a new historic high in Live Cattle Futures has been reached, we will look for a new 1-2-3 top formation over the next several days/weeks.

Daily Live Cattle - 12-31 Feb 2014

Shorting Live Cattle Off a Wide 1-2-3 Top Formation

There is a beautifully wide 1-2-3 top forming in February Live Cattle Futures.  Notice that the #1, #2 and #3 points are weeks apart.  Also the 50% retracement level on the Weekly Chart is at 126.525, leaving lots of downside profit potential.  Markets generally move down faster than they move up, so we expect a rapid drop in Live Cattle prices if prices collapse below the #2 point at 131.25.   Since this 1-2-3 top formation is so wide, we can expect a nice drop even past the most recent major move (shown by the 50% retracement level on the Weekly Chart) and further down the next most recent move from the low of 112.225 shown the Weekly Chart.

This is a great trading opportunity shaping up.  We will watch close for prices to fall below the #2 point and then short the Live Cattle market.

Daily Live Cattle - Feb 2014Weekly Live CattleMonthly Live Cattle