Live Cattle futures have been on a steady move higher since price bottomed in early April. Like price, sentiment moved higher during that move – bottoming at 8% Bulls on 04/03 and peaking at 93% Bulls on both 08/11 and 08/12. Even though price continued to move higher through 08/14, sentiment dropped to 85% Bulls – that type of divergence always catches our attention. In this case, we think this setup gives us a nice short opportunity.
Here are the filters we used to develop our trade plan:
- DSI: Close between 80-90% Bulls
- Five-Day Price Change: Gain between 2.3-4.3%
- Two-Day Sentiment Change: Loss between 6-10% Bulls
Since 2006, this setup has happened only five other times: 04/04/11, 01/17/14, 06/27/14, 11/18/14, and 03/17/16.
Trade Setup
Looking those past examples, we came up with the following trade plan:
- Sell $LE_F on the next close below 109.800
- After we enter the short position, place the following two orders:
- GTC Buy Stop at 110.850
- GTC Buy Limit 10 points below the entry price
If we used the same methodology to trade the previous setups, we would have entered four trades with a 75% Win Rate and average return of $2.8K per trade (average loss -$1K and average win of +$4K).
CONVICTION. EXECUTION. DISCIPLINE.
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