After what looked like a breakout in the live cattle market on Friday after a $2.37 rally with the news of Phase 1 of the China deal being done, we are starting to see a little bit of a pullback in the market after Monday and Tuesday’s trade. I see the market continuing to trade sideways or down for the rest of the week and test the 10 DMA at $125.815 (FEB Contract). If more details emerge on what China will be buying, then I would think this market bounces off the 10 DMA and make another move to the upside. The April contract showed us that a top is in with a possible key reversal on the chart and that could signal to the longs in the market to liquidate their position giving back the premium the futures market had to the cash for the near-term.
Managed money fund traders held a relatively large net long position of 78,214 contracts in the last COT update. The USDA boxed beef cutout was down $3.05 at mid-session yesterday and closed $4.27 lower at $212.81. Cash trade for Tuesday was quiet with no trades reported and the drop in the boxed-beef market was the biggest one day drop since Nov. 7 and the lowest since Oct. 7.
Finally, we have the Cattle on Feed report comes out this Friday and the expectation is that the placements are going to increase 1.2%; marketings are looking to be 2.6% lower than last year; and the on feed number is expected to increase 1.9% from last year. The USDA estimated cattle slaughter came in at 123,000 head yesterday. This brings the total for the week so far to 243,000 head, unchanged from last week, but up from 228,000 a year ago. If we get the numbers that are expected in the CoF report then I suspect that would be the confirmation of the downturn in the market and have further liquidation of the longs, with a target of 122.50 to 120.00 in the Feb contract.