Technically Speaking

Feeders in Focus Within Livestock Complex

August feeder cattle show a textbook bearish divergence with price unfolding, which should result in weaker price action moving forward. (DTN ProphetX graph by Tregg Cronin)

AUGUST LIVE CATTLE:

Since our last technical update on the livestock sector in mid-June, the live cattle market has enjoyed mainly rangebound trade. In the last several sessions, however, August live cattle appear to be gaining downside momentum as they sliced through the 50- and 100-day moving averages on Friday. Momentum indicators have turned sharply lower, but instead of indicating how "oversold" this market is, stochastics instead show just how weak the technical structure is. From our vantage point, August live cattle look to head toward support from early June at $117.225, with even more support around $116.00 from late April. The $116.00 level is significant as that level was also held as support twice back in February and March. We would expect that level to hold on any serious setback attempts and offer a base and reversal level for corrective rallies. Otherwise, the rangebound environment is expected to persist with additional whipsaw trade likely.

AUGUST FEEDER CATTLE:

Over the last week or so, feeder cattle have held up technically better than the live cattle market, although we think the former is living on borrowed time. As one will note on the daily chart, price action of late has retained a sideways to higher trend. In doing so, however, momentum indicators have begun to diverge, setting up a textbook bearish divergence from price. Without a rebound early this week to negate this divergence, we feel price is bound to confirm the bearish divergence in the days and weeks ahead. If the divergence is confirmed, we would expect price to move below the corrective low from last Thursday at $156.75 rather quickly. This would open a retest of the corrective low from July 1 at $152.20. There are a few support candidates along the way to $152.20, which could offer a momentary pause. The 100-day moving average sits at $154.03 while the 50-day moving average is just below at $152.77. The fact the 50-day moving average lines up almost exactly at the July 1 corrective low of $152.20 looks awfully convenient for holding any serious selling assault.

AUGUST LEAN HOGS:

Since our last technical read on the lean hog market on June 21, price action has mainly been consolidating in a sideways trading range. That said, the consolidative nature of trade has also produced a flag formation, which should resolve itself with a breakout in the not-too-distant future. Given the fact this market sold off into the formation, the technical trading manual would suggest it will be resolved with a breakout to the downside. Supporting a continued bearish policy is the most recent Commitments of Traders report from the CFTC. As of July 6, managed funds still held a net-long position of 67,207 contracts. Despite this market having corrected over 16% since peaking in early June, the managed fund long is still almost 70% of the largest net long ever held. That net long in and of itself is not bearish, but if the market would happen to leak lower and challenge additional support candidates, those long positions could become vulnerable. Corrective lows at $98.100 and $96.500 should act as support if sell pressure emerges early in the week.

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 him on Twitter @5thWave_tcronin

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