CTS Spotlight for the week of February 18, 2011

Hello and welcome back to CRI's CTS Spotlight,

02/18/11: In a week that saw little new develop with the currencies themselves, many long standing trends within the commodity space have re-exerted themselves. Considering we are 11 years into this 17.5 year commodity super-cycle, one ought to expect further commodity price appreciation for another 6.5 years. Supporting the notion of higher commodity prices to come, both the Australian and Canadian dollars in particular and world equity prices in general look like they all want to move higher. Of particular bullish note this week, Silver & Palladium impressed (both breaking to new highs) and the Meat complex moved higher across the board. This week's CTS will look at the meats a little closer to see what may be going on there. 

The meat complex

This week I thought we would take a good look at a couple representatives from the meat complex. What I like about this blog entry is that we get to see the bull flag formation in its completed form and the bull flag formation just as its breaking out.

While a little backwards, lets start with the bottom two charts, being the Live Cattle market. You will notice that CRI's CTS had the live cattle market breaking out and trending higher from $100.00, 27 weeks ago. The price pattern was fairly clear in that prices rallied dramatically from the fall '10 lows (from 80 to 100) then consolidated for several months (between 90 and 100). When prices broke through the 100 level last fall, one could be fairly confident that the upside objective of the price pattern was going to be hit (that being roughly 109). Since each point here is $4, 9 points represents $3600 US, not a bad sum!

So this brings us to today, and with what is going on in the Pig market. Lean Hogs (used to be called Live Hogs) are very much like Live Cattle in that farmers are constantly weighing the cost of sending their animals to market or holding off for higher prices. It would seem, the recent culling of animals around the world is taking its tole on the sheer supply of livestock which may make up the farmers' minds for them. Regardless of the fundamental reasons (one could make an equally bearish argument due to rising feed prices), the recent break above the '10 peak suggests prices want to move higher in earnest. Like the Cattle, this breakout may take weeks to develop but a move into the 110 area doesn't seem too out of the question. Like the Cattle too, this market may make traders some BIG money as that target is 17.5 points higher. Each point here is $4 so we are talking about $7,000 per contract!

So is there a trade here?

I personally don't like open futures contracts (I like to keep what little hair I have and be able to sleep a little at night). If one were to do a futures trade, one would have to risk down to 65 or more than 25 points (Ya, I know, totally unrealistic). With this in mind, I took a look at the options for Aug '11 (six months time). Unfortunately, they are very rich and only at $110 would we make any money so I am going to just put them on my screen and watch for a while. Should we get a correction to clean up the Daily over-bought condition, I may look to enter into the trade. Of course, if there is a possible double in the making, you can be sure subscribers of CRI's OnlyDoubles NewTrades will be kept well aware of the situation.

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com