Technically Speaking

Emotions, anxiety and volatility always run high when a market is in record territory -- that's the price to be paid. But given how much is at stake, how does one try to minimize emotions and make practical decisions? Technical analysis can be a great tool to have in the toolbox in such circumstances.

There is a wealth of information in this weekly feeder cattle chart, but the most important item currently is the ascending triangle that prices broke out from at the end of December. It's been years in the making, adding to its significance. The burning question on everyone's mind: Is the recent retest of the breakout marking the end of the rally or just a correction?

Starting at the end and trying to answer that as best I can, it is very common to see a correction after a breakout, testing support that had been old resistance. You must remember, prices have been rallying sharply since the September low in this case and substantial profits will be held by some thanks to the $50 per hundredweight (cwt) gain. It is not uncommon for profit taking to occur after a breakout with the trigger this time being the opening of the Mexican border and delay of tariffs on imports.

The normal pattern would be for support at old resistance to hold, attracting new buyers that want or need to buy (including those holding short positions that are abandoning their thesis), turning prices back up and on their way to the next target. From a technical analysis point of view, the target for the move (following such a breakout) is determined by assuming the price will move as much after the breakout as it did forming the base of the ascending triangle.

In this case, the late break in 2023 resulted in prices falling from $265/cwt to $209/cwt or roughly $56/cwt. The target following a breakout of the ascending triangle would then be calculated as the resistance level of $265/cwt + $56/cwt = $321/cwt (for nearby feeder cattle futures).

Is that reasonable to assume? That is not a question for technical analysis to answer. It is just a target based on past behavior. The limited supply of feeder cattle and the lack of herd expansion, meaning it may be a greater problem as time goes on; the high cost of breeding stock along with higher interest rates, making expansion a challenge on an industry wide scale; the potential for imports to be disrupted in the current political environment; the continued consumption of beef regardless of price; and so on -- will have the final say.

Stepping back and adding common sense to try to explain the formation -- let's consider what is happening in the market. When the price falls, if buyers are convinced the market will push higher, they do not want to wait for it to fall to previous lows to begin buying for fear of missing out. Then, when the price rallies, the sellers are not quite as confident and let the market get back to previous resistance before they start selling. This continues back and forth until one side abandons their thesis. In the case of an ascending triangle, the seller is the one with less confidence (usually for some fundamental reason) and the one who abandons their strategy, often having to buy themselves out of short positions and adding to the breakup.

On the accompanying chart, you can see a smaller example of an ascending triangle play out in late 2022, early 2023. A breakaway gap accompanied the breakout -- implying sharply higher prices to come. Take note of the return to the top of the gap by the third week (or bar -- given each week's price action is represented by one bar) prior to the acceleration to the upside. Similar to what we could be witnessing right now. As a side note, in the big picture move, the gap would also be considered a midpoint gap. The measured move from such a signal suggests the market is halfway through the rally. $190/cwt - $120/cwt = $70/cwt, added to the gap at $190/cwt = $260/cwt, reached by September of 2023.

Also worth noting, you can see the September rally from the 100-week moving average as a stark example of why we pay close attention to such things. Just another tool in the toolbox.

All of that said, unforeseen events can change both the fundamental and technical outlooks. The goal is to develop plans based on targets but also know ahead of time how the strategy should change if it no longer appears the targets are valid. And always monitor the situation for signs of an outright failure of the thesis, complete with a strategy on how to deal with it.

On a parting note, a meaningful close below $265/cwt (old resistance, now support at the breakout) would not be a great sign. A close below support at old resistance at $260 would be worse, and a close below the December low of $253.80/cwt would likely signal a failure of the breakout. The most likely fundamental reason for such a failure would be an economic breakdown, complete with a significant downdraft in the stock market -- considering the trade views beef as a luxury item.

The other notable risk to be aware of is the managed money trader record net-long position and the risk of a disorderly liquidation. Although that is a possibility, it's worth recalling that the final $65/cwt gain prior to the 2014 top in feeder cattle had a similar setup. In that case, the managed money traders patiently waited for higher prices before taking profits on long positions while the producer/merchant/processor/user group pushed prices up while buying back their short positions. In effect, the final $65/cwt was a liquidation phase for all market participants -- and something similar cannot be ruled out this time.

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I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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