Natural gas and cattle are beginning to form constructive bottoms, says Andy Waldock.
With numerous open positions to navigate the Commodity Futures Trading Commission’s COT report is showing two constructive bottoms ready to be exploited.
In the meantime the entire interest rate complex remains overbought (See table).
Natural Gas
Natural gas is beginning to construct a significant low. The September contract just fell through its double bottom from February 2016 and May 2018. These new lows have ushered in a swarm of speculative breakout selling ahead of anticipated seasonal weakness that has been compounded by to mild domestic temperatures. In fact, the speculative position has increased by 20% in the last three weeks.
We see this as the beginning of the rush to the bottom. So far, commercial buying has been the result of lifting short hedges and booking the profit on the futures side of the trade by natural gas suppliers. We know this because the total decrease in the total position has caused the net position to become increasingly bullish.
Energy dealer purchases will mark the second step of the bottom building process. We’ll see the commercial total, and net positions move higher. Then, we’ll begin looking for long entry opportunities.
Live Cattle
We pretty well nailed the cattle sell-off but following the commercial traders made it easy as we said on April 23.
“The live cattle market remains primed for a major top. Both the commercial and speculative traders have set new net and total position records. To put this in perspective, I did some number crunching. Obviously, any measurement will be extreme when taken in the context of record positions, but the speculators are now long three times their average position size, while the net short commercial position is a whopping 5.6 times its average.”
The speculative net position has declined by more than 40%, and their total position has declined by more than 35%, since the end of April. This is precisely the type of speculative washout that the COT signals are designed to capture, and now, the packinghouses are stepping in to bid for their future supplies. The commercial bid has now pushed their momentum into positive territory, and the market is currently oversold. We think live cattle will continue to be supported by packers’ bids and will look for buying opportunities on the recent decline and ahead of anticipated seasonal strength.
Equity traders who do not have access to futures can look for the ETF equivalent, the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW).
Silver: Friday’s reversal in silver was confirmed by commercial selling. Offset the silver position. We’ll try again later.
Corn: We were also stopped out of the corn. However, the commercial growers in the corn market have just pushed their net position to its most bearish level in the last 52 weeks. We’ll continue to watch for short selling opportunities as corn providers continue to lock in future delivery prices with abandon.
Oats: The large speculators used last week’s consolidation to add to their net long position. The large specs have surpassed their early May COT ratio high, and are now net long more than 15 contracts for every short. March of 2018 was the last time the market was this imbalanced, and oats fell by 13% over the next three weeks.
Stick with the short sale, risking it no higher than $3.25 per bushel.
Crude: This will be a crucial week in the crude oil market. The market has consolidated for the last two weeks after falling more than 20%. The consolidation has allowed the market to build up both reversal and continuation numbers on a short-term basis. We issued daily COT buy signals in crude and heating oil for Friday’s trade.
The consolidation over the last two weeks has created a setup for a volatility breakout. A reversion to recent volatility would pierce the consolidation range and signal the next leg of the energy move. Typically, consolidation means continuation. Our protective buy stop has not been hit, but should be lowered to $53.85 to lock in profits and protect against a more substantial move higher.
Listen to Andy talk about seasonality and the COT Report at the recent TradersEXPO New York
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