A bullish momentum divergence has occurred in the Dec/Feb live cattle futures spread. I have provided some past examples of bullish and bearish momentum divergence below. This article is a continuation of the “The 800 Pound Live Cattle Gorilla” article posted last week..
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While you can opt to enter into a position just on divergence alone I would recommend against that most of the time. Exceptions to this can made by those who trade in large size and scale their positions on bullish divergence. The reason being is that bullish/bearing momentum divergences can sometimes last for a while. This general rule applies more to bullish divergence than bearish. Additionally, this goes along with the old saying that markets fall at twice the rate than that in which they increase.
You should always attempt to apply other indicators to confirm your entry points. The one thing to watch out for is to be sure your not using a different indicator that is essentially the same as the others you may be applying to a given chart. You want to apply indicators form the lagging, leading and time current classifications. When applying indicators from all classifications you then achieve true analysis diversification.
As expected, an occurrence on a monthly chart would have more significant long-term implications that one a weekly or daily chart.
Note: If you look at the CBOT rice futures chart below you can see where a divergence occurred in multiple successions. This occurs more often at market bottoms than tops. This is prime example were divergence occurred and the market continued to drag at the bottom before beginning a bull move.
IMPORTANT NOTE:
With the Goldman roll starting next week we could easily witness something very similar to the rice chart below where you have a multiple divergence succession take place before any bull move takes place. It would just be in a much quicker time frame, days not weeks or months, since the rice chart is a monthly chart and the live cattle spread chart above is daily. But the concept is exactly the same.
If this occurs look to scale into (long Dec / short Feb) into the weakness as this would be a bullish divergence based on the spread reverting further from its mean on the Goldman roll. However, once the roll is finished, (selling Dec and buying Feb) look for the spread to quickly revert back to its long-term mean of around (-) 1.00 under.
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A recent bullish momentum divergence in corn futures can be witnessed in the chart directly above. While it was only a slight divergence it has bullish implications nonetheless. As mentioned earlier, since this divergence occurred on a monthly chart it carries more weight than if it had occurred on a weekly chart.
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An example of bullish momentum divergence in CBOT rice futures. This example also provides support for the argument why you would want to use other indicators for timing of your entry and not initiating a position just on the divergence alone.
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Recent bullish momentum divergence that occurred in CBOT soybean futures. Since this trend is still intact the jury is still out on this one as to how long it will last.
Aaron Trading is a fully licensed and registered commodity futures broker. Additionally, foreign exchange trading is also available via our institutional foreign exchange platforms Currenex and FX All.
Paul Skarp
Website: www.aarontrade.com
Disclaimer: There is a substantial risk of loss in trading commodity futures and options trading. Under no circumstances should you ever use scarce funds to engage in any type of speculation including commodity futures and options. Past performance in not indicative of future results.
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