This is one of the assets that did not take advantage of the global rebound triggered on the commodities markets a few months ago. Live cattle are quoted in US Dollars per pound. From a historical high posted in August last year (point A on the weekly chart, at $109.2), the price action has been correcting by 26% until now. The current price is just above $80.
This current level may be an opportunity to jump back into live cattle, as there is a long-term support line that should prevent prices to drop lower. The support line is a descending slope that joins the regular lower lows posted since early 2007 (points B, C, D, E and F).
Since last December, three rebounds already occurred each time after prices hit this support level. But each time they fell back quickly towards it. The weekly MACD became positive in early February this year when it crossed above its moving average. However the positive signal is weakening as price action does not confirm on the upside.
We believe that the current test may another opportunity for a rebound….or for a deep plunge. Sounds obvious? Ok, so let’s precise when we reckon. The current configuration is a typical one that suggests a sharp move to come, however we are not sure about the direction. It’s more a bet on rising volatility rather than a particular direction.
Indeed, the trading range has been narrowing for several months now. The volume was quite weak those past days as investors and traders are uncertain. They reduce their exposure and wait for more indications before opening new trades. Look at the Bollinger Bands: they are historically tight. And one the main interpretation of this indicator is that sharp price changes tend to occur after the bands tighten, as volatility lessens.
The support line suggests a potential rebound but the indicators argue for a continuation of the fall: the RSI and the 30-day momentum indicator are bearish. That’s why it’s difficult to predict the direction. It’s better to bet on the volatility and a future sharp move.
The idea is therefore to place two entry trade orders in the market on both sides of the current price, where we think that the price action will have chosen its direction). It’s essential to give an OCO order (which means “one cancel the other”). The idea would be to place an order to “SELL” below the previous low (point F), say at $79.20. If the price action hits this level, it would mean that the support level has been cleared and that a further plunge will occur.
On the upside, place a “BUY” order above the recent high (point G), say at $85.10. If the price action hits this level, it may mean that a rebound is going to develop higher. If one of those two orders (”SELL” at $79.20 and “BUY” at $85.10) is executed, then it will automatically cancel remove the other order from the market. This is possible thanks to the “OCO” that you have to mention to your broker or that you specify in your electronic trading platform.
Australian Agricultural Company
This stock is the largest beef cattle producing company in Australia. From July 2002 to January 2008, it benefited from a long-term bullish trend that drove the price from $0.62 to a historical high price of $3.60.
Between January 2008 and December 2008, it lost 67% of its value when it fell to a low of $1.19. The long-term support line that was backing the price action since 2002 was cleared in October 2008. Since last December tow major rebounds occurred and were triggered on a medium-term ascending support line.
The weekly RSI is well oriented now and suggests a further retracement on the upside. On the daily chart, the medium-term support line is made by the low of last December (point A) and higher low points B and C. The daily Chande Momentum Oscillator (CMO) also suggests that a rebound is possible. The price action typically bounces when the CMP reaches extreme low levels, below or close to the oversold area (values at -50 and below).
This is what happened in last December and in last March (see black ellipses on the chart). The price action corrected during the month of May then briefly plunged to $1.45 2 days ago. It immediately bounced back and is now trading around $1.59.
A further bullish move is expected: the level of $2 seems to be a reasonable objective on the medium-term. It’s a 25% potential move. This level is indeed a previous intermediary support (point D) that became a resistance (point E).
The trade idea is therefore: BUY AAC on the current levels, with a stop-loss at $1.40 (below the medium-term support line). Place your take-profit at $1.99.
