Technically Speaking

Cattle Corrections, Lean Hog Rally Slowing

June lean hogs have continued their rally, but the most recent leg has featured slowing momentum as prices have ascended to new highs. In addition, the build up of the net-long positions by managed fund traders remains a caution flag as prices sit at contract highs. (DTN ProphetX Chart)

Since peaking on March 22, June live cattle have beenexhibiting fairly typical corrective behavior with the current short-term uptrend likely the B-wave of a larger A-B-C corrective sequence. The initial A-wave of selling was held by the 50-day moving average, which supported prices on several sell-off attempts. Momentum indicators have been trending higher with the B-wave corrective move, although no clear divergences are present. Much more distinctive has been the trend in on balance volume (OBV), which has been in a sharp downtrend since the March 22 peak. Despite the downtrend, the outright OBV reading is still bullish at 68,383 contracts, which suggest bulls are still in control. Managed money traders remain heavily long in the live cattle market with a net position of 148,591 contracts. This position, along with an overall downtrend in price, makes a resumption of strength above the March 22 high a tall task. We would be watchful of any short-term bearish divergences in momentum, which would suggest the conclusion of the current B-wave and a resumption of new lows below the $118.700.

May feeder cattle futures are exhibiting similar price action to that of June since their peak on March 22. After the initial A-wave of selling concluded on April 3, the counter-trend rally to date looks characteristic of a B-wave as part of a larger degree A-B-C corrective sequence. Also, similar to live cattle, May feeders held their 50- and 200-day moving averages with the lows from April 2 through April 4. The April 3 lows at $146.600 would be the most important downside risk paramter in our view since a break would reinstate the downtrend and result in further losses straightaway. While not excessively long, managed funds are also net-long in feeder cattle at 4,787 contracts, nothing close to the 15,000 to 18,000 contract longs held at the end of 2017. OBV has posted lower lows on the most recent rally attempt, but the outright value at 19,187 contracts would suggest price action in the last two weeks has been dominated by bulls. The most important levels in our opinion for gauging the next trend in feeders is the $151.425 high from April 4 and the $148.825 corrective low from April 11.

June lean hogs have been one of the more exciting markets the last couple of months thanks to explosive price action and heightened volatility. The "easy money" has been made in this market with price action turning more choppy and corrective as of late. Navigating what is either a peak-and-reversal threat, or simply consolidation ahead of the next leg higher, can be incredibly difficult. In looking at the stochastic measure of momentum, we see the potential for a textbook bearish divergence in momentum as price action made higher highs while momentum made lower highs. However, to confirm such a divergence, price action would need to trade all the way down to $86.25. This is an incredibly wide range, but such is the reality of trading in a market with volatility readings over 37%. Before getting anywhere close to that level, we would be interested in the $93.525 corrective low from April 10 as the level that needs to be broken to open the door for further downside losses. To confirm a resumption of the uptrend, price simply needs to break the contract high at $99.825 from April 5. All applicable moving averages are below the market and of little technical value. The uptrend in lean hogs remains intact and further gains should not surprise us, but we remain wary of the developing bearish divergence in momentum, suggesting this rally is slowing, which often happens at the end of prounounced moves.

Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.

Tregg Cronin can be reached at tmcronin31@gmail.com

Follow Tregg Cronin on Twitter @5thWave_tcronin

(BAS/BE)

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