December live cattle futures have enjoyed an impressive rally off their contract lows set earlier this month. The rally has not quite spanned a 50% retracement of the entire April through September sell-off, but a continuation of the rally this week would bring it close. Momentum indicators foretold the rally as the stochastic measure of momentum diverged from price as futures sank to contract lows on Sept. 9. The bullish divergence in momentum is as textbook as one will ever see, confirming the divergence with trade above the Aug. 26 corrective high at $106.55. One could also make the argument the December contract has an inverted head-and-shoulders pattern, confirming with strength above the August highs. If this pattern were to unfold in textbook fashion, a projected price target of $114.25 could be seen, taking us back to the July highs. Fueling the rally has been a managed fund position, which sank to a net short of 6,885 contracts as of Sept. 17, the first net-short position since 2016.
November feeder cattle have uncorked an equally impressive rally, having closed higher in five straight sessions and 10 of the last 12 sessions. The November contract moved above its 50- and 100-day moving averages in the last two sessions for the first time since April with the 200-day moving average resting just overhead at $145.52. Like live cattle, feeder cattle sported a bullish divergence in momentum as prices sank to new contract lows in September. Importantly, momentum is not diverging from price on the rally as price makes new highs, indicating this move does not appear to be slowing down ahead of a possible turn. November feeder should encounter resistance at the July 30 highs at $143.975, but if price makes it through that hurdle, additional upside of $4 to $5/cwt is possible.
December lean hog futures have shown strength during the month of September, although not to the degree of their cattle brethren. Trade last week saw the December contract retrace 61.8% of the July 24 to Sept. 10 sell-off at $71.495. The stalling of upside price strength is a bit concerning as momentum has clearly slowed. By the letter of the law, momentum hasn't diverged from price, but it is so close to doing so it might as well be considered a divergence. This does not bode well for hog futures continuing the recent spate of strength. Along with the 61.8% retracement, the December contract also rejected the 100-day moving average at $71.41 as well as the 200-day at $70.87. Managed funds are net long 21,455 contracts of lean hogs with that exposure generally being liquidated over the last several months.
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 firstname.lastname@example.org
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