Technically Speaking

If it was any other market, I would feel fairly safe in saying the attached weekly chart shows a dramatic change in trend. However, the market in question is lean hogs (the February contract) and hogs have historically laughed at technical patterns as they went on their merry way. This time could be different, though, and with few other markets showing patterns of significance, it's time to take a look at what is indicated on the weekly chart.

To start with, the spike high to $94.90 two weeks ago jumps out at you as soon as you look Feb lean hogs. More important, the contract closed lower for the week establishing what looks to be a spike top. Fast forward to this week's action and the contract has traded above last week's high of $92.40, below last week's low of $90.35, and trading at $90.77 appears to be on track for a lower weekly close (last week's settlement was at $92.075). Those familiar with this blog will recognize this pattern as a secondary bearish reversal, confirming the idea that the trend turned down following the previously mentioned spike high.

In conjunction with this activity in the futures contract, weekly stochastics have been holding above the overbought level of 80% for quite some time. As the Feb contract moved to its high and closed lower for the week, stochastics established another in a long line of bearish crossovers (the faster moving blue line crossing below the slower moving red line above the 80% level), also indicating a move to a downtrend. From a technical point of view it would seem the cards are now stacked against remaining market bulls.

If the trend does turn down, how far might it go? Fundamentally the market remains neutral to bullish, with both the December to February and February to April spreads trading above five-year averages. In fact, the latter (Feb to April) is the strongest it has been over the last five years (for this point of the year). Given this commercial outlook the Feb futures contract should see a 33% to 50% retracement of its previous rally. With the contract already within striking distance of the 33% retracement level near $89.40, the more likely target becomes the 50% retracement level near $86.65.

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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.