It may sound a bit far-fetched, but navigating trend changes in financial markets is like riding with a long-distance cattle drive. Hear me out: In both cases, the best position is at the front of the herd, which is actually reserved for the most skilled, senior cowhands.
It follows that the worst position is behind the herd. This area is reserved for novice cowboys (called “pilgrims”) or insubordinates. It’s also known as the “dustbowl” for the clouds of dirt that the herd kicks into the riders’ eyes.
Let’s take the association one step further and apply it to the recent price action in live cattle. In late 2012, live cattle prices were rallying to new contract highs. And, according to the mainstream pundits, the 'fundamentals' would keep prices moving due north. Here, the following news items from the time set the scene:
· “There are the ingredients for a bullish formula in cattle prices… An outlook for a sharp drop in beef production this year remains the main foundation for… an uptrend in cattle.” (CME Group)
· “US cattle herd at its lowest level since 1952. The uptrend remains firmly intact.” (Associated Press)
· “Hopes of a US ‘fiscal cliff’ resolution ignited fund buying across a wide range of commodities, including cattle. In this environment, no one will be able to stay on the short side for long.” (Reuters)
Rather than driving north, however, live cattle prices turned south in a precipitous slide to the recent contract lows. The mainstream riders who thought they knew what the herd would do found themselves covered in dust.
The reversal in live cattle prices did not catch everyone
by surprise. In the November 2012 Monthly Futures Junctures,
EWI’s senior commodity analyst and Futures Junctures Service editor Jeffrey Kennedy remained one step ahead of the herd. There, Jeffrey presented an exclusive print-and-video “Featured Market” segment on live cattle that included this bearish message and chart:
“This month we explain why the bearish forecast is momentarily on hold. Much of our analysis remains on track… Should prices exceed 135.90, we will embrace the alternate labeling. Those wave counts allow for moderate additional rally beyond 135.90 before beginning a multi-month bear market that will push prices” significantly lower.”
The next chart comes from Jeffrey’s May 17 Daily Futures Junctures. It shows how cattle prices have followed the Elliott wave pattern.
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