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Bullish Divergences Lead Cattle Higher

08/01/05 12:08:10 PM
by David Penn

Month-on-month positive stochastic divergences anticipate a reversal in cattle futures.

Security:   FCV5, LCV5
Position:   N/A

The legend of Hillary Clinton, futures trader, tells us the that former first lady and current New York senator first managed to turn a $1,000 investment into more than $6,000 "overnight." From that sixfold increase, Clinton managed over the course of the next ten months to turn that $6,000+ into nearly than $100,000.

I don't know how repeatable that kind of performance is--and a number of critics have suggested that her performance is not repeatable (at least not while playing by the rules). Still, the possibility of turning a small nest egg into a veritable financial aviary is one of the things that continue to lure traders large and small into futures trading.

Figue 1: The fact that both the stochastic and the MACD histogram made higher troughs in July relative to June, while the price of October feeder cattle made lower troughs, suggests strongly that the next big move in cattle will be upward.
Graphic provided by: Prophet Financial, Inc.
And while we're at it, let's stick with cattle. October feeder cattle topped out in June, with October live cattle topping out a month earlier in May. While feeder cattle provided a clear negative stochastic divergence to mark its early summer peak, live cattle was relatively more discreet, simply rising and falling as the commodity ran out of buyers in late spring.

Figure 2: With the deep MACD histogram of June confirmed by the lower lows in the price of October live cattle in July, this market is ready to move higher if volume trends cooperate.
Graphic provided by: Prophet Financial, Inc.
But there is nothing discreet about the price action in both feeder and live cattle in late July. The surge on the final trading day of the month sent both futures soaring, with live cattle gaining just under a point and a half and feeder cattle tacking on just over a point and a half. For those unfamiliar with the leverage involved with futures, know that a one point (or, rather, one cent) move in live cattle is worth $400 and a one point move in feeder cattle is worth $500.

The MACD histogram/stochastic method I've written about frequently before in both Advantage and Working Money suggested entries that would have been quite worthwhile here. In October feeder cattle, there was a "histocastic" buy signal on July 20th that allowed for an entry at 105.58, and in October live cattle, there was a similar buy signal the day before, the 19th, that called for a long entry at 82.77 %BD or 82.78. Both would have been filled in by price action on Friday the 29th.

Both commodities face near-term resistance in the form of previous consolidations in June (feeder cattle) or previous peaks in July (live cattle). Moving forward in August, strong volume trends on any follow-through to the upside will likely be the most reliable indication of whether or not cattle will remain as bullish as it appears right now.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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Date: 08/02/05Rank: 3Comment: 

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