Exploring the use of technical indicators as pricing guides in feeder cattle production criteria

Abstract

The objective of this study was to examine the use of technical indicators, in an econometric context, as guides in making pricing decisions relative to feeder cattle production. Technical indicators were developed for both the short and long term. Short term indicators were designed to capture divergence/convergence between the Relative Strength Index and the futures price stream to form the Price Linked to Divergence index. A long term indicator using an average difference in price over a longer period was developed to form the Price Linked to Trend index. These indicators were used in the econometric models which in conjunction with cash production costs formed a hold/price/sell decision framework.

Analysis was conducted on fall-to-spring, spring-to-fall, and fall-to-fall production programs. Results for the three production programs in both the in and out-of-sample environments showed that on average a futures price in the top half of the futures price range was captured. This resulted in average improvement in returns through hedging for every program.