We wrote here at Equities.com on June 30th that we thought cattle were finding support in, "Cattle Finding a Bottom into Summer." Over the last six weeks however, commercial traders have come back to the market on the sell side. Based on the commercial traders' deteriorating evaluation of the fundamental picture along with the clear technical signals, we're not only exiting our longs; we're going short October live cattle.
Cattle have rallied about 10% since we first started nibbling on the buy side and have traded right up to the downward trend line beginning at last June's high, as you'll see below. More importantly, commercial traders have been sellers in each of the last three weeks, as they were net sellers of more than 17,000 contracts. This has decisively shifted their momentum back to the negative side. Their lack of faith in the market's rally as we tested the first resistance level is disheartening to those of us who thought we may get a summer bottom.
Based on our current positions, we see the $114.375 per/cwt level as critical. We published a Discretionary COT sell signal for August 5th's trading but, the congestion allowed us to sit with the current long position while waiting to see if we got another spike higher, through the aforementioned trend line. It doesn't appear as though this will materialize and as swing traders, we need to take profits when they present themselves.
Banking further on the current setup, we'll be creating an outright short position on a fall through the week's congestion above $114.375. If this order is filled, we'll place a protective buy stop to protect the position at August 4th's high of $116.35. Finally, we'll see what the commercial traders do if the market falls back under $110 and evaluate our positions from there.
If you'd like more information on our methodology or have an interest in our Discretionary or, Mechanical Commitments of Traders nightly emails, please visit CotSignals.com.
