Now, let's move to the daily chart and the trade setup. We look for markets where the commercial and speculative traders are waging battle. The bigger the battle, the better. Their conflict is graphically depicted via the combination of plotting commercial traders' momentum in conjunction with our variation of RSI. The setup is very straightforward. When the commercial traders are short, and a market becomes overbought, we begin looking for a reversal in line with the commercial traders' momentum. This is the case in the current live cattle setup. Commercial traders are exceptionally bearish while speculative bullishness is record-setting. Once the market reverses, we issue the appropriate trading signal and place a protective stop order at whatever the swing high or, low turns out to be. We've illustrated the Discretionary COT Signals and the protective stop levels on the daily live cattle futures chart, below.
The daily chart shows the trading signals generated by our COT Signals methodology.
Therefore, the current setup calls for selling short the December live cattle futures and placing a protective buy stop at the recent swing high of 127.875. Finally, there is a strong seasonal component that should be addressed. The February live cattle contract tends to be extremely weak from a bit before Thanksgiving all the way through Christmas. Therefore, even though we've initiated this trade in the December live cattle futures (we are currently short), we'll add a February contract through our seasonal research in the not too distant future. In fact, the model we'll be employing has won more than 70% of its trades selling cattle during this period.