09-20-2018: Decembeer Live Cattle: Hurricane, Trade War, Grain Prices, and Swine Flu, So What?

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

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01

3

4

5


Introduction

2 A significant number of analysts familiar with the meat markets are telling us that futures have become disconnected with reality, and the hurricanes, pork swine flu, trade war, and contra-seasonal tendencies have all been given too much credit for a rise in cattle futures prices. Market is overbought, and reality will soon sink in. But the technical indicators suggest otherwise and are swamping out what many analysts are saying. Compared to historic prices, cattle prices are closer to "average" and could have a way to go reasonably higher. Our seasonal analysis contradicts the analysts claims for that as well, so that in a narrow victory, we must accept that our "system" requires us to stick with the trend. Maybe the above negative factors are more significant than analysts think. Will they change the "news" and "views" to fit the upward march in futures prices?


Intermarket Analysis

We fed Live Cattle, Feeder Cattle, and Lean Hogs into a neural network to get the following result:




Parabolic Chart

Decembeer Live Cattle:

Parabolic Chart


Nirvana Chart

Decembeer Live Cattle:

Initial Chart


News Analysis

There are hopes that the U.S. will be a major exporter of meat. African Swine Fever was discovered in both China and Belgium, raising concerns about pork availability in the months ahead and affecting all meats and cattle. Hurricane Florence could also directly affect hog supply but negatively affect beef and pork demand. USDA reported slaughter for the last week at 652,000 head, up from 563,000 the previous week and up from 646,000 a year ago. Boxed beef cutouts close at $204.27 in recent data down from $206.56 the previous week. Beef production is expected to increase by 355 million pounds from the third to the fourth quarter, and there is a seasonal tendency for the price to increase at this time of year. But the contra-seasonal increase is a potent bearish factor. Futures are trading at a stiff premium to the cash market, whereas without swine fever they would normally be trading below the cash market.

Demand may diminish, and the current rally in cattle futures seems more technical than fundamental, especially in front of a big incoming supply. The futures market is definitely in overbought territory. Feeder cattle futures are hitting contract highs.

Inventories continue to include large backlogs of forward purchasing cattle, with weekly purchases keeping packing plants ooperating at near capacities. Processing margins declined by almost $100 but remain between $150-$200 per head. Packer margins generally seasonally decline in the fall but $200/head is a generous margin for beef that moves in and out of the plant in days. There has been a slight decline in exports over the past two weeks.

The live cattle futures contract has become disconnected to the cash market for fed cattle. There has been a failure of the cash market reporting toi reflect a change in how cattle trade. Participants in the futures market have been prevented from the necessary cash information required to make knowledgeale decisions. There has been a thinning of the number of reported trades between packer and cattle owners. In Texas, it is not unusual for 1-2000 cattle to serve as the base prices for 100,000 cattle slaughtered in Texas, with Kansas following the same trend. The liquidity necessary to reduce volatility in the futures market will not occur if new traders are unwilling to participate in the market. A "blockchain" is needed as a public ledger of all transactdions executed in a particular market.

One aspect of the cattle market is expectation for a strong corn yield which should keep feed prices low. Most analysts are predicting that beef prices will weaken in the fall. But Hurricane Florence hit at the worst possible time, just as crops were ready to be harvested. There were approximatelyi 5.4 million head of cattle and calves in the path of Hurricane Florence. An outbreak of swine flu suggests the possibility of a change in the epidemiologic situation worldwide to include a pandemic. Outbreaks have ocurred over considerable distances from China to Europe and from Africa to Russia. Spillover from reduction in available meat supplies for hogs affects cattle prices as well.

Recent price movements are working against seasonal tendencies of calf prices. A price risk is now being taken to the downside.

Hurricane Florence appears to have not caused significant damage in most processing areas. Traders will be waiting to hear how bad plants were flooded and how long processing will be delayed, estimated to be at least up until now, but possibly not much beyond. Analysts are looking at a current futures price resistance area. High cash cattle are meeting lower consumer beef prices.

Our general assessment of the news is that trade war, swine flu spillover, and hurricane concerns have been overdone and that the cattle market is beginning to show signs of weakening after excessive optimism countered normal trends. As Archer Financial Services put it, "There's simply too much uncertainty in the world not to reward the highest volume in live cattle futures of over 132,000 contracts in months by establishing some protective hedges. Typically, when everyone is leaning the same way, something totally unexpected develops." Live cattle futures for October and December are testing the upper end of trading ranges whereas deferred contracts have blasted through these levels.


Point & Figure Chart

133.0|                                                                  T  9/17
     | CME - Dec-18 Live Cattle, 40000 lbs., c/lb. Cm.=0.08  Lim.= 3.6
     |
     |
     |         X
128.0|_________XO______________________________________________________________
     |         XO  X
     |         XO  XO        X
     |         XO  XO        XO
     |         XO  XO        XO
123.0|_________XO__XO________XO________________________________________________
     |         XOX XO        XO
     |         XOXOXO        XO
     |         XOXOXO        XO
     |         XOXOXO        XO  X
118.0|_________XO_O_OX_X_____XO__XO____________________________________________
     |         X    OXOXO    XO  XO            X
     |         X    OXOXO  X XO  XO            X
     |         X    O OXO  XOXOX XO          X X
     |         X      O O  XOXOXOXO          XOX
113.0|_________X________O__XO_OXOXO__________XOX_______________________________
     |         X        O  X  O OXO        X XOX
     |         X        OX X    OXO      X XOXO
     |         X        OXOX    O OX X X XOXOX
     |       X X        OXOX      OXOXOXOXOXOX
108.0|_______XOX________OXO_______OXOXOXOXOXO__________________________________
     |     X XOX        O         OXO OXOXO
     |     X XO                   OX  OXO
     |     X X                    OX  OX
     |     X X                     X  OX
103.0|_____XOX____________________O___O________________________________________
     |     XOX
     |     XO
     |     X
     |     X
 98.0|_____X___________________________________________________________________
     |     X
     |     X
     | X   X
     | XO  X
 93.0|_XO__X___________________________________________________________________
     | XO  X
     |OXOX X
     |OXOXOX
     |OXOXOX
 88.0|O_OXO____________________________________________________________________
     |  OX
     |  OX
     |  OX
     |  O
 83.0|_________________________________________________________________________
     |
     |
     |
     |
 78.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
         111                 11
      999011124455556667788990111134445566667789
      002201320101120221223020000100221211221111
      297171024052567682480769828714044348691630
The above chart is giving a conventional buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical low and a weak seasonal up period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R". It is giving a sell signal.

Internal Printout 1 Internal Printout 2

Results of "%R" for Live Cattle (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a long-term buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $400. Initial margin on a single contract is $1,650. Use of options is advised.


Historic Range

Scale traders are not a factor in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Live Cattle February 124 Put and Sell (1) Live Cattle February 127 Put @ 1.850 to the sell side or greater.


o 1 o 2

o 3

o 4 o 5


Calendar Spread

What the Dec. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at -1.20 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -2.50 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be headed toward the sell the far, buy the near point.





Level Table:

Level Table

The path of least resistance is up.
128.5|                                                                  R  9/17
 CME - Dec-18 Live Cattle, 40000 lbs., c/lb. Cm.=0.08  Lim.= 3.6
     |
     |D
     |DDD
126.0|DDDD_____________________________________________________________________
     |DDDD
     |DDDD
     |DDDD
     |DDD
123.5|DDDD_____________________________________________________________________
     |DDDD
     |DDD
     |DDD
     |DDD
121.0|DE_______________________________________________________________________
     |CDE
     |CCDEEELLL
     |CCCDEEEEFFKLLL
     |CCEEEEEEEFFFKKKLL
118.5|CCCEEEEEFFFJKKKLLLL______________________________________________________
     |BBBCEEEEFFJJKKKKKLLLLLLM[
     |BBBCEEFFJJJKKKKKKLLLLLLMM[[   <<<
     |ABBCEEFFJJKKKKKKLLLMMMM[[
     |ABBBBCCCCCCEEFJJJJKKKKKKLLMMMMNN[[
116.0|AABBBBCCCCCCCFFFHHHJJKKKKLMMMMMMMMNNN[___________________________________
     |AAABBBCCCCCFFGHHHJJJKKKMMMMMMMNNW[
     |AAAABBBCCCFFGGGHHHHHJJKMMMMNNNWXXZZ[
     |AAAABBBBCCFFGGGGHHHHJJMMNNNNNWWXXXYYZZZ
     |AAAAABBBCFFGGGGGHHHJJMMNNNNVWWWWWWWWXXXXYYYZZZZZZZ
113.5|AAABBFFFFGGGGGGHHJNVWWWWWWWWWXXXXXYYYYZZZZZZZ____________________________
     |AAABBFFFGGGGGGGHJJUVVWWWWWWWXXXXXYYYYYZZZZZ
     |AAABFGGGGGHJNNUVVWWWWXXXYYYYYYZZZ
     |AGGGGNNUUUVVVVVVWXXXXYYYYYZ
     |GGGHHNNUUUUUVVVVVVXXYYYY
111.0|HHHNNNNQQQTTTUUUUUVVVVYY_________________________________________________
     |HHHJNNPQQQQQQTTTUUUVVVY
     |HHHJJNOOPPPQQQQQQQTTTTTTUVVVVV
     |JNOOOOOPPPPPPPQQQQQQQQQRRRSTTTTTTTTUUVVV
     |NOOOOOOOPPPPPPQQQQQQQRRRRSSSSTTTTTTTTUUVVV
108.5|OOOOOOOPPPPPPQQQQRRRRSSSSSTTTTTTUUUV_____________________________________
     |OOOOOPPPPPPQRRRRRSSSSSTTTTUUUUV
     |OOOOOPPPPPPRRSSSSSSTTUUUV
     |OOOOOPPPRSSSSSSSSTTUUU
     |OOOPPPRRSSSSSSTTU
106.0|OOORSSSSTT_______________________________________________________________
     |OOORRRSSST
     |OOORRRSST
     |OORRR
     |ORRRRR
103.5|ORRR_____________________________________________________________________
     |ORR
     |OR
     |O
     |
101.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.540
         1 1 1 1 1 1 1                                                
       9 0 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 8 9           9
       1 0 1 3 1 2 1 2 1 2 0 2 1 2 1 2 0 2 0 2 0 1 0 1 3 1           1
       9 2 6 0 3 8 2 7 1 6 9 6 2 6 0 4 8 2 6 0 5 9 2 6 0 4           7


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 9/17 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                 LEZ8    December Live Cattle

                      High Price:  125.0
                   Current Price:  118.1
                       Low Price:  114.7

                            Risk:  0.057
                     Opportunity:  0.115

                    (O/R) Ratio =  2.029


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News - 1
Point & Figure + 1
Cyclicals - 1
Seasonals + 1
Internal System 1 - 1
Internal System 2 0
Third System + 1
Historic Range 0
Commitment of Traders - 1
Range/Volatility - 1
Level Table - 1
Other Factors + 1
Total + 0
Place 9 December Live Cattle on a Buy Watch with stoploss @ -4.30 below the get-in point when recent price is represented as "151.52".
____________________________________________________________________________________________________________________________________________M.T.