After being subjected to selling pressure for the majority of the week, the November feeder cattle contract found support at the 23.6% retracement level between the contract’s low, and the contract’s high. The low for the day was only a few ticks off of the actual 253.825 level, coming in at 254.050.
There’s no question about it – feeder cattle futures have outperformed over the course of the last calendar year, but it’s well substantiated when considering the market’s fundamentals. However, the question we’re looking to answer is whether or not Thursday’s move higher is sustainable. So, let’s take a deeper dive.
Corn prices and feeder cattle prices typically do not move in the same direction. Over the course of the last 8 trading sessions, a new trendline in December corn has emerged – showing corn push toward the upper-boundary of the 20 cent trading range it’s been stuck in over the last 5-weeks.
Friday represents a “triple-witching” event in which we have a (1) USDA Grain Stocks report (2) end of a fiscal quarter (3) end of the month. Per the latest CFTC Commitments of Traders report, managed money funds have amassed more than 319k short-positions in corn futures. Thus, any fund rebalancing will likely materialize in a short-covering rally.
Now technically speaking, if the 23.6% retracement is tested, it’s statistically probable that the 38.2% retracement is tested as well. If a short-covering rally materializes in the corn contracts tomorrow, it could put significant pressure on the November Feeder cattle contract, and lead to long-liquidation within feeder cattle futures. The chart below shows managed funds’ positions in feeder cattle futures, which unsurprisingly hold a significant net-long position of 102,372 contracts. Broken down, that is 119,259 long positions compared to a meager 16,887 short positions.