Technically Speaking - What Should We Expect in the Live Cattle Market?

December 11, 2009

Name: Dennis Smith

Company: Archer Financial Services

Years Trading: 21

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The bearish fundamentals have their grip on the live cattle market. Given the recent action in the cash steer market, the wholesale beef market and the live cattle futures market, I don’t think you’ll get much of an argument that the beef fundamentals are bearish. However, live cattle many times can/will put in a spike low. It appears like this may be the early phase of such a situation. Below is a brief discussion of what to expect during this spike low.

Weekly chart support comes in at 7920 on the continuation chart. The December contract is threatening to close below this weekly support on Friday, December 11th. If it does, the downside target on the weekly chart would be a test of 7365-7400. These are the lows established on the weekly in April of 2006.

Looking at the most active February live cattle contract, the previous contract low at 8415 was penetrated this week. A sharp move down appears to be in progress. Many times the live cattle will establish a spike low (in the month of December) and it appears this may be exactly what is occurring. Major spike lows were established in live cattle in December of 1998, 1991, 1982 and 1981. From the recent contract low, the shallowest spike was 100 points in magnitude and the largest spike amounted to 900 points. We’ve already exceeded 100 points below the previous contract low. Two of the four spikes were from 250 to 350 points in magnitude. Thus, using the recent contract low in the Feb 2010 contract, one can expect a spike low in the 8065 to 8165 range. If we stretch the market to as much as 900 points below the previous low, one can expect a move to as low as 7515. If the Feb were to move this low, no doubt, the Dec contract would be trading down into major support on the weekly chart.

What should one expect out of the current spike low in progress?

First; given the magnitude of the global recession and the extreme volatility in all commodity markets, look for the spike to exceed 350 points to the downside. Thus, one can expect a move to at least 8065, basis the Feb live cattle contract. My guess/estimate is that Feb live cattle will likely bottom in the 7865 to 7965 range. I’m guessing that Dec will be trading near 7500 at that point in time. The low will likely be established on a spike in daily volume approaching 100,000 contracts.

Given these downside objectives, what can one expect if they are achieved? In every instance in which a spike low was established in December, the Feb contract staged a massive recovery prior to expiration.

Dennis Smith
Senior Account Executive
Archer Financial Services, Inc.

If you would like to discuss trading/hedging strategies in the live cattle market give me a call or send an email. dennis.smith@archerfinancials.com 877.377.7905

About the Author

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 20 years. Dennis has a wide range of customers, many of whom are grain and livestock producers. Dennis develops and helps execute hedging and speculative strategies in his Daily Livestock Wire which is prepared each afternoon exclusively for his customers. Dennis grew up in Central Illinois before launching his brokerage career.