In This Issue

Morning Opening Calls

Spread Trade Idea

Reports and Expiration Notices

March 15th, 2006 — Issue #318

Morning Opening Calls

Getting ready for the new trading day? Wondering what the markets did overnight and what developments to look for?

If so, check out our "Morning Opening Calls" section located under:
Market News > Morning Opening Calls
or directly at http://www.futures-research.com/open.htm

Spread Trade Idea

By Moore Research Center, Inc.

Bull Flags?

Sometimes a trend fully corrects a prior move, but a trend on the run might only consolidate before continuing. The latter behavior can appear in so-called continuation patterns and one of the more easily recognizable - and tradable - is a bull flag.

Trends often correct 40 to 60% of recent gains or losses, allowing participants to regain their balance as consumers and producers adjust. But some changes are so dynamic that their as yet unfulfilled trends are interrupted only by a pause to consolidate changes already made. In such cases, prices may not move sharply counter to the prevailing trend as a correction often does.

In a strong uptrend, for example, prices might instead move modestly lower in an orderly series of alternating rallies and declines. On a chart, such activity might take on the appearance of a bull flag --- with the strong uptrend providing the pole and the series of lower highs and lower lows bounded by two parallel lines forming the flag itself. Once complete, the formation can thus provide a platform from which to launch another thrust upward. The prevailing trend is said to be ready to resume when the market breaks out of the formation by decisively penetrating the trendline above the series of lower highs.

Consider a relationship between feeder cattle and live cattle. Live cattle prices tend normally to remain strong into early March but then to decline when slaughter surges (usually in April) into its peak in May/June. Demand for feeders, which may require 4-5 months to finish after placement, tends to wane during the first quarter in order to avoid both piling numbers onto numbers and the tighter feed supplies of summer. Thus, spreads between the two normally favor live cattle to outperform feeders into March.

From there, they tend to reverse and favor spring feeder cattle through May. The heavier the slaughter, the more numbers will need to be replaced - albeit not immediately. Perhaps the market needs to bid high enough to buy sufficient animals away from pasture. But the typical seasonal decline in cash prices for live cattle is perhaps the drive more responsible when this feeder/fat spread sustains its trend. And sustain it has for the last several years. In fact, the Long May Feeder Cattle/Short June Live Cattle spread has closed more favorably toward feeders on about May 20 than on about March 17 in each and every one of the last 16 years. (Because these futures differ in size, MRCI calculates and plots this spread as the difference in their contract equity values, as expressed in US dollars. A move of 1.00 cents/pound in feeder cattle is worth $500/contract whereas that for live cattle is worth only $400/contract. The industry tends to refer to nominal price spreads, which floor brokers accept. The CME offers a 70% margin credit for feeder/fat spreads in a ratio of 2:3. For a 1:1 ratio, the exchange offers fractional credits, requiring a minimum of $878 for a feeder contract and also $725 for one live cattle. Not all clearing firms offer fractional credits, however.)

This year the spread thrust higher from last July into late December, with the equity spread running from about $16,000 all the way to just above 22,000. It has since declined in a series of modestly lower highs and lower lows bounded neatly by parallel lines --- closing this past Friday on the lower one at $20,410, down from the peak of the most recent rally at 21,550. Will it respect those lines or crater into oblivion?

Its high near 22,000 was the widest ever for any May Feeder/June Live Cattle spread. And even though it has succeeded in each of the last 16 years, it did so in only 2 of the prior 14. Thus, traders may want to require this potentially high-risk spread to perform this year, waiting for a show of strength, perhaps by breaking out above the gentle slope of its upper downtrend line. The USDA will next estimate Cattle on Feed on March 24.

Looking for more information about seasonal trading? Future spreads? Click here.

There is a risk of financial loss in futures and options trading. Futures trading is neither easy nor an easy way to make money. It takes hard work to have success. Please use sound money management when trading futures. Past performance is not necessarily indicative of future results. Nothing in this newsletter is intended to be a trading recommendation for you to buy or sell futures or options. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Readers are solely responsible for how they use the information in this newsletter.

Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!