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.

Pullbacks

July

soybean meal

(SMN3:CBOT) is triggering Monday out of a classic pullback-from-high setup. Here are the hallmarks of a classic pullback setup. First, you have a market that has demonstrated momentum. Meal began accelerating in late March and hit a contract high on April 17. Second, the market pulls back for three to seven days. Meal entered the week in a three-day pullback.

Ideally you'll see a range-contracting -- inside days where the high is lower and the low is higher than the previous session. Soybean meal logged an inside day Friday. A market will then "trigger" when it trades above the high of the low bar in the pullback and make a decisive move to the upside. This is what's occurring in Monday's session in what appears to be a classic continuation of the uptrend.

July

coffee

(KCN3:NYBOT) also closed at a two-month high last week and is in day four of a pullback off the high. Coffee has an upside seasonal bias, as sellers sit it out on the sidelines, waiting for the frost season in the world's largest producing nation, Brazil, to pass.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he was short pork bellies and long feeder cattle, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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