November feeder cattle tested its January contract highs and then backed off close just below them. If funds don’t manage to push through to close above this resistance level, there could be a correction coming. The November contract has shot over $7 higher in the last week so a correction would make sense, but any correction will likely be brief and fairly shallow as long as fundamentals remain strong. Fundamentally, the outlook for feeder cattle still looks good, so a pullback is a good opportunity to build a hedge position. A quick run up of $7 in as many days makes an attractive profit for traders who were fortunate enough to get in at the low end of the move. Failure to close above the $165.10 resistance could trigger a pullback by long specs selling to take profits, while hedgers and top-picking specs could add to the selling pressure with new short positions. Most likely on the buy side would be funds trying to push through the stops set above $165.10 and traders with existing short positions looking at any pullback as a chance to stop the bleeding. Barring a run up in corn or some sort of demand surprise that pressures live cattle, any pullback should be short-lived, as fundamentals look very good. Beef demand continues to improve, production is declining, exports have stopped the slide they were taking earlier this spring, and the cost of gain is substantially lower than last year. Current projections for the cost of gain for cattle placed in November are $90/cwt to $95/cwt and, with April live cattle trading at $134, cattle feeders can pay as much as $165 for 750-lb steers and still make money feeding them. A surprise in the corn crop or beef demand could still take the air out of the feeder cattle market, so I view any correction as a good opportunity to build a hedge position. A pullback will likely take prices back to $161.50 to $162.50, where there should be very good support. I’ll be buying $166 calls at that point, and then trade them for $164 puts at even money when the market makes another run at taking out resistance. On any close above $165.10, I’ll buy $170 calls and trade them for $166 puts when the market reaches $168. I’m selling the board outright on any indication in a negative change in fundamentals.
Posted on: Thu, 26 Sep 2013 18:27:45 +0000
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