Technically Speaking

April Lean Hogs Set to Turn Down Again

Source: DTN ProphetX

At first glance, the weekly chart for April lean hogs would seem to be showing an uptrend. And truth be told, the market could indeed try to move higher in time. But from a technical point of view, April hogs are nearing the establishment of a bearish key reversal that would signal a resuming of the secondary (intermediate-term) downtrend that began with the spike top the week of October 28, 2013.

If you look closely back at that time, you'll see the contract established its high of $96.40 before closing lower for the week. Also, weekly stochastics established a bearish crossover (bottom study, faster moving blue line crossed below the slower moving red line) confirming that the secondary trend had indeed turned down. Now, if you move two weeks to the right, you'll see that April hogs established a secondary bearish outside week while stochastics grew more bearish.

Fast forward to the week of January 13 (four weeks from the far right hand side of the chart), and the contract established what looks to be a bullish key reversal. The contract moved to a new low of $89.875, traded above the previous week's high of $91.575, and closed higher for the week. Also note that the weekly low was a test of support near $90.075, a price that marks the 38.2% retracement level of the previous uptrend from $79.85 (week of March 18, 2013) through the high of $96.40.

But this reversal could be viewed differently, indicating a change to a minor (short-term) uptrend but not a secondary uptrend. Why? Because weekly stochastics were still well above the oversold level of 20%. This could be interpreted as a move to a secondary sideways trend, setting price resistance between $92.05 and $94.25, roughly the 33% and 67% retracement levels of the initial selloff from $964.40 through the low of $88.875.

The last couple of weeks have seen the contract trade above the high side of this range, but not build the type of bullish momentum to challenge the previous peak. This week's activity has the contract on the verge of establishing another bearish outside week, possibly viewed a key bearish reversal, offsetting the bullish signal from mid-January and reestablishing the secondary downtrend.

If so, where might the pressure come from? According to weekly CFTC Commitments of Traders reports, noncommercial traders have spent the previous two weeks partially rebuilding their net-long futures position. This Friday's report, for positions as of Tuesday, February 4, could show more of the same. However, it is also likely that the latter part of this week has seen renewed selling interest.

More importantly, the commercial view of the hog market is growing increasingly bearish. The April to June futures spread (not shown) is showing the latter holding a premium of about $10.85. This is stronger than the five-year average $9.93, indicating continued pressure in the cash market should be seen. This lack of support from the commercial could spark the renewed noncommercial selling interest discussed earlier.

If the secondary trend does turn down again, initial support remains at the 38.2% retracement level near $90.075. But if weekly stochastics are going to move back below the 20% level, a 50% retracement to $80.125 or 61.8% retracement to near $86.175 might be need to occur.

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2/8/2014 | 7:47 AM CST
Update: Friday's close saw the April lean hog contract close 0.075 lower for the week, keeping the bearish outside week pattern in place. Had the contract posted a higher weekly close it would have been a bullish outside week, indicating a possible extended rally.