Technically Speaking

Live Cattle: Home in the Big Range

Source: DTN ProphetX

The live cattle market has posted a solid rally off recent lows, highlighted by the more active February's move off its low of $127.70 on November 17. Its short-term daily chart shows the contract to be in a minor uptrend, testing resistance and appearing poised for a bullish breakout.

The attached chart shows the Feb live cattle contract was in a solid short-term downtrend starting with the double-top formation near $145.425 (October 22 and October 28). From there the market fell to an initial low of $129.65 (November 10), leaving a bearish price gap (red ellipse) between $139.65 (low from November 4) and $139.35 (high from November 5) along the way. After a short-lived, two-day rally (November 11 and 12) the contract returned to its downtrend, eventually posting a spike low of $127.70 on November 17.

There are a couple of things to take note of on the daily chart: First, the low of $129.65 followed by a two-day rally established a bullish crossover (faster moving blue line crossing above the slower moving red line) by daily stochastics (bottom study) below the oversold level of 20%. Second, though the contract moved to a new low of $127.70, note that it did so on a day when it established a bullish reversal by trading well outside the previous day's range and closing higher.

If we discount the spike low, much like the spike high of $145.975 on October 29, the contract established a double-bottom at $129.65 (November 10 and November 16). Connecting the highs and lows since November 16 (again discounting the November 17 low) shows the contract has been consolidating in a wedge formation. Given that the most recent signal by daily stochastics was a bullish crossover, this wedge formation could be considered a possible bottoming formation.

So where might Feb live cattle go from here? Connecting the highs starting with November 12 ($136.60) puts trendline resistance at $134.125 Monday (November 30). This is slightly below the 33% retracement level of the previous downtrend at $134.90. Using the approximate $7.00 range at the widest point of the wedge ($136.60 high to double-bottom low at $129.65) and adding that range to a potential bullish break of trendline resistance puts the upside target near $141.10. Note that this takes the contract up to the 67% retracement level of the previous downtrend and closes the bearish price gap left in early November.

One area of possible concern is trade volume. Market technicians will note that this sideways-to-up move has occurred on declining volume, with Feb live cattle registering only 9,429 contracts changing hands this past Friday. However, it is not unusual for trade volume to decline during a consolidation phase and increase after it breaks out of its pattern. Therefore, a move above trendline resistance Monday (possibly) should see an increase in trade volume.

If/when Feb live cattle extend its minor uptrend to the $140 to $141 area daily stochastics should be at or above the overbought level of 80%. At that time the market could start to run out of short-term momentum and turn down again. However, it is also possible that bullish signals could then be established on longer-term weekly or monthly charts.

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