December Live Cattle:
At the end of September, we discussed the developing importance of the bullish divergence in momentum, which occurred in August and September at the lows. This was confirmed with trade above the Aug. 26 corrective highs and has performed strongly during the month of October. On Friday, December live cattle hit the highest level since May 1. Trends are up on all applicable scales with the rally expected to continue in the near term. A few caveats worth noting include the fact the rally, which began on Sept. 10, has not featured any meaningful corrective activity. In addition, momentum indicators such as the stochastic measure of momentum have been slowing and declining since hitting a high on Sept. 27. It is difficult to call the slowing momentum a bearish divergence just yet, but the indicator is certainly not making fresh highs along with price. The current view of stochastics is a great reason why momentum tools should never be used to indicate "overbought" or "oversold" conditions. Those terms have no place in technical analysis as using momentum to indicate such a condition would have had one exit the live cattle market before the bulk of the move took place. The rally has moved through the 61.8% retracement of the entire $124.175 to $98.200 sell-off, leaving no technical levels of merit between spot levels and contract highs from April 18.
November Feeder Cattle:
Many of the same technical features in live cattle are present in feeder cattle, although the rally has not been as impressive as the one in live cattle. In addition, the divergence in momentum from price has been much more pronounced in feeders than in fats. One could go so far as to call it a bearish divergence in momentum as price has made new highs. To confirm the divergence, technicians would like to see trade below a meaningful corrective low like the one on Oct. 2 at $139.575. At that point, the short- and intermediate-term trends would be considered down. In general, feeder cattle are not likely to go anywhere live cattle do not, and vice versa. The question becomes which market will be the leader and which will be the follower with live cattle looking strong ahead of new highs, while the feed cattle move looks tired and prepped for lower prices. With momentum indicators showing signs of slowing or divergence in both markets, we would be mindful of any short-term failure that could place fund longs underwater and accelerate sell pressure.
December Lean Hogs:
Unlike their cattle brethren, lean hogs have been locked inside a choppy range for much of the last two months. Despite rather volatile trade within that range, price has more or less been contained between $60.00/cwt and $72.00/cwt. This has produced two key risk parameters from which to gauge directional bias. To the downside, the Oct. 8 corrective low at $63.075/cwt and to the upside, the $72.725/cwt corrective high provided excellent directional triggers. Admittedly, a large amount of whipsaw risk exists in a $9.65/cwt range with the midpoint of that range around $67.895. While it shouldn't come as too much of a surprise, the volume point of control, or VPOC, is $68.7000, which is very near the midpoint of that range. The VPOC signifies where the most volume has changed hands over a certain period of time. The volume profile also shows heavy volume at the top end and bottom end of the range, which should mean solid support and solid resistance on any further challenge. Momentum indicators appear to be bottoming at the lower boundary, adding support to the idea rangebound activity should persist.
Tregg Cronin can be reached at firstname.lastname@example.org
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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.
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