Multiple Factors Converge in the Meats

Upon entering any trade, the ideal situation is to get as many factors working in your favor as possible. July pork bellies (PBN3:CME) have multiple factors aligning to suggest they will continue dropping after a rebound off the April lows.

First, we have a big-picture head-and-shoulders pattern, a bearish omen. Next, bellies have an unfilled gap from April 9 that served as resistance on Thursday and Friday of last week. Bellies also closed below the 50% retracement of their most recent downswing and held below the 50-day exponential moving average on both days, additional resistance factors that occur at the bottom fringe of the gap.

Friday's price action also suggests a move lower. The outside bar down completely engulfed the body (the open and close) of the prior day, a negative sign.

For traders wary of markets they might be unfamiliar with, bear in mind that pork contracts have a very low and slightly negative correlation with stock index averages and thereby provide a diversification opportunity.

Remember that constructing a diversified portfolio of stocks still leaves one long U.S. equities. Truer diversification comes from holding a basket of instruments -- both long and short -- with low intermarket correlations.

Brimming With Action

Also in the meats, May feeder cattle (FCK3:CME) are poised to make a larger-than-normal move. Here's why. Volatility is mean-reverting, so markets that have recently demonstrated a period of low volatility generally return to their average volatility by making a larger-than-normal move. This mean-reverting characteristic of volatility doesn't predict market direction, only that there exists a greater chance for an outsized move.

Still, feeders' cup-and-handle formation -- and the two-month high close coupled with the subtler pattern of higher lows -- suggest the move out of the low-volatility situation will be to the upside.