After the persistent downtrend in April and early May, August live cattle futures are showing signs of life. The three-day recovery to close last week failed to push above the May 10 corrective highs at $109.92 but momentum indicators are encouraging. The stochastic measure of momentum shows a textbook bullish divergence as prices made new lows, while the stochastic indicator showed higher lows. If price can overtake the May 10 corrective highs, this would confirm the bullish divergence in momentum, signaling the start of at least an intermediate-term uptrend. Without getting the cart in front of the horse, a further recovery to the 38.2% or even the 50% retracement level of the $119.95 to $106.22 sell-off would not surprise. A significant amount of length has been shed by the managed fund community as they reduced their net-long from April 23 at 155,183 contracts to 87,039 contracts last week, the smallest net-long since December. This provides ample room for managed funds to rebuild a net-long should uptrends be reinforced.
In similar fashion to live cattle, August feeder cattle have a textbook potential bullish divergence in momentum, which would be confirmed with trade above the May 10 corrective highs at $148.10. Adding support to the idea price has possibly put in a more intermediate-term bottom is the fact volatility on futures prices has risen to 20.78%, which is the highest since June. Volatility commonly spikes around turning points as traders are caught out of position from being lulled to sleep after long, trending moves. To wit, managed funds were net-short 2,687 contracts of feeder cattle as of May 14, which should provide ammunition should price be able to take out a corrective high like that from May 10. The 38.2% and 50.0% retracement levels of the $161.40 to $140.50 sell-off exist at $148.48 and $150.95, respectively. These would be our upside price targets should price be able to move through the first line of resistance at $148.10.
July lean hog futures have sported their own recovery effort the last four sessions after price dipped to the lowest level since March 15. As is the case in the rest of the meat complex, lean hog futures have a potential bullish divergence in momentum, which would be confirmed with trade above the May 2 corrective high at $97.22. If prices can indeed recover above that level, an assault on contract highs near $102.00 would seem likely. Managed funds have shed length in lean hogs the same as live cattle and feeder cattle, but not to the same extent. As of May 14, managed funds were net-long 51,774 contracts, which is only 8,000 contracts off their recent high in late April. This makes lean hog futures look slightly less encouraging than cattle futures, which do not have the same level of speculative length. That said, it was encouraging for us to see price make its turn near the 50% retracement level of the entire $75.02 to $102.45 rally. The combination of a bullish divergence in momentum at a Fibonacci retracement level is usually a good combination for a change in trend holding.
Tregg Cronin can be reached at email@example.com
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