The text below is the verbatim text for the video below. I’d recommend watching the video for greater visual context.
This video recorded Thursday, December 10, 2015. It examines the mid to long-term dynamic currently playing out in the live cattle futures market. For those of you who trade or even watch this market, you’re probably well aware of the fact that after an aggressive five year rally from 2009 to 14, the Live Cattle market has since the November 2014 high been in a relative freefall state. The old adage what comes up must come down certainly applies here, with the current selloff angle being a symmetrical reflection of the preceding rally. Oftentimes the church steeple rally manages to give up 80% or more of the preceding gains, though if you measure the gains from the 2009 lows when the accelerated portion of this rally began, I think the 5/8’s to 2/3 downside retracement is a respectable enough support region to absorb the brunt of the downside correction looking ahead to 2016 and beyond. More importantly, this support region is consistent with several long-term chart formations I’ll be showing you in a moment that are found on both the traditional monthly continuation chart and the more commonly used, volume-based active monthly continuation chart. I could spend 10 minutes explaining the difference between the two continuation chart data configurations, and how I combined the two in my analysis, but to keep this video to the point I’ll refrain from doing so. But I will say that, very simply, the traditional monthly continuation chart maintains the front contract until it expires completely on the last trading day, regardless of whether or not it’s the most active contract. I call this a traditional continuation chart because it is the format used for many decades by pencil and ruler technicians until recent decades, when the increasing computerization of market data allowed for a more customized rollover on the continuation charts, resulting in what is now the more common active continuation chart, whereby the most active, high-volume contract is always reflected on the long-term continuation chart, this despite the fact the front contract is still in existence. I personally lean more on the volume-based rollover charts for determining my technical levels, but I still methodically consult the traditional rollover charts knowing there remains a respectable number of institutions and traders who continue to use it in their analysis.
So with that said, we’ll examine both charts, and if you’re new to this you’ll have to stick with me here for it gets a bit complicated with the numbers as we jump back and forth between the two different chart-types. First let’s take a look live cattle’s traditional monthly continuation chart, which as of this early December recording continues to reflect the December 2015 contract activity and not the higher volume February 2016 contract. The December 2015 contract is roughly 5.50 basis points lower in value than the active February 2016 contract. The spread between the Dec and February contracts fluctuates continuously, and so if you’re to execute a trade in the active February contract based on support shown on this traditional continuation chart, you’ll need to make constant note of December price activity in relation to its price support levels. In other words, this traditional monthly continuation chart shows, for the month of December, a gradual convergence between a former 35 year ascending channel top at 115.00 and a 20 year channel bottom projected off the 1996 low at 111.350. This is considered a significant range of long-term support for the December contract, which will remain on this chart until that contract expires on December 31, 2015, at which point the February 2016 contract will replace it. But at this early December juncture, the 111.350-115.000 region equates to a February contract 116.85 – 120.50 price support region, one that will change in lockstep with the spread between the Dec and Feb contracts. In the month of January these formations rise to 111.825-115.100, and once the February contract occupies this chart on the first trading day in January, the February contract will then show long-term support in the 111.825-115.100 region. These formations are rising and narrowing as we proceed into spring trade, and if you pause this video you can see where those numbers fall through June 2016. This is considered significant long-term support for the lead live cattle futures market, so that when the February contract expires on February 29th, it will then be replaced by the April contract, and once that expires on April 29, the June contract will inherit this support region.
Now let’s move on to the more commonly used volume-based, active monthly continuation chart, and because the February 2016 contract is the most active, it is currently reflected on that chart. Long-term support here is not altogether different, as the 35 year former channel top comes in at 113.325 for the month of December, and the rising 20 year channel bottom at 114.675. These formations are also rising on a monthly basis, and if you pause the video you can see the exact support levels through June 2016.
Given the recently heightened whipsaw activity followed by continued lower monthly settlements, I do think this market is, shall I say, destined to continue south into the 111.825 – 113.325 region over the next 5-8 months, this ranged rising gradually and determined by incorporating both the traditional and volume-based monthly continuation charts shown a moment ago. As of this early December recording I’m referring to February contract support. One thing you can be sure of, I make these chart and spread calculations in ongoing fashion and they are continuously reflected in both my Daily Live Cattle futures analysis and my Monthly Futures Wrap, of which Live Cattle analysis is a regular component.
On a more near to midterm basis, we have a fairly well-defined descending channel structure on the weekly active continuation chart at 120.475 for the week of Monday, Dec 7th, dropping at 0.600 point per week, and representing respectable mid-term support able to contain monthly selling pressures as we look ahead into later winter and next spring. For all intents and purposes, this support is best defined on a weekly or daily chart, for the rate of descent is too steep to provide reliable monthly chart support – a topic I’ll avoid altogether for the sake of brevity. If you are a subscriber to my Daily Live Cattle futures letters you’ll certainly be made aware of the location of this intermediate support, and if we settle below it on a weekly basis the long-term support structures I showed earlier in the 111.825 – 113.325 region would be expected within 1-2 months.
Let’s take a look at the upside scenarios, and when the current one year freefall should not only stabilize, but quite possibly reverse into next summer. For the week of Monday, Dec 7th we have a channel top currently at 140.775 that forms the start of a range of midterm resistance up to 144.025 able to contain monthly if not quarterly buying pressures, once tested the market then susceptible to rotating south again to the channel base that I previously illustrated at 120.475. However, if or when the active contract settles a weekly session above this 144.025 formation, dropping at 0.525 a week, the one year bear market will have completed itself, with recovery then expected within several months into the mid-150.00’s, an event that would be well covered in my daily live cattle futures letters and Monthly Futures Wrap.
In summary, as of this early December recording, resistance in the 140.775-144.025 region can contain quarterly buying pressures when tested, below which the 111.825-113.325 region remains a 5-8 month target. On the way down, channel support at 120.475 can contain monthly selling when tested, yet a weekly settlement below this formation indicates the targeted 111.825-113.325 region within 1-2 months, long-term support able to contain selling through 2016 – perhaps the balance of the decade.
Despite the somewhat complicated description of the two different continuation chart data configurations I hope you found this Live Cattle market information useful, and if you’d like a two week free trial in my daily live cattle futures letters or would like to take a look at the current issue of my Monthly Futures Wrap just shoot me an email or visit my website and fill out the free trial form. Within hours you have access to the current material and for the next 14 days, no questions asked. Stay tuned for future market analysis videos. I’m Cary Artac, and thanks for watching.