Technically Speaking

Weekly Analysis: Upside Waning in Livestock Contracts

October live cattle are flashing a potential bearish divergence in momentum on the stochastic indicator, warning of a market that has run out of upside fuel.

Live cattle futures remain in short- and intermediate-term uptrends, although the jury is still out whether the current strength dating back to May is corrective or impulsive. The most recent uptrend stemming from the July corrective lows is either the third wave of a larger degree five-wave bull move higher, or the C-wave of an ABC corrective sequence, which would warn of fresh lows below the May lows. From a shorter-term perspective, the front-month continuous chart featuring the October contract, is giving some warning signals as a potential bearish divergence in momentum on the stochastics coupled with price knocking on the 200-day moving average could warn of a looming setback.

Looking at a longer-term weekly chart for help with the short-term direction, there is a contracting triangle pattern forming off the October 2016 lows and the April 2017 highs. It looks as though price would meet the tip of the triangle sometime in early 2019. The potential bearish divergence in momentum could signal the next move will be lower, although the 50- and 100-day moving averages rest just below at $108 to $109.79.

The lean hog market continues to trade in erratic fashion with a large gap above the market stemming from the July to August roll period. That gap exists from $69.975 to $79.725, a particularly large gap and lowering the likelihood it needs to be filled completely. The October contract is right in between the major moving average with the 50-day just below at $57.495 while the 100- and 200-day moving averages are overhead at $67.30.

Momentum indicators such as stochastics appear to be diverging from price, although the signal is not definitive just yet. Another sign possibly tipping the short-term scales lower is the fact the rally from $48.925 to $57.25 measured from the $54.20 corrective low from Sept. 17 extends to $62.525, which was almost the exact high on Sept. 26. While it isn't clear whether the current rally is the third wave of a larger five wave move higher, or a C-wave of an ABC corrective sequence, which would warn of new lows below $48.925. The most likely scenario in our opinion would be a correction of the most recent rally back just above the $57.25 corrective highs. Consolidation and holding of those highs would argue strongly for a resumption of the trend and new highs above $63.05.

The feeder cattle market is bull-flagging, which should argue for new highs above the $159.90 highs from Sept. 14. Momentum has already corrected hard from the $159.90 highs and looks much more balanced, which doesn't suggest another rally attempt would fail on slowing momentum. The most active November contract remains above all major moving averages, a testament to the strength of the current uptrend. From a weekly perspective, price is nearing the May and November 2017 highs that have capped this market for 18 months. Momentum from that scale does have a potential bearish divergence in momentum, which would warn bulls that don't have the resolve to break the range cap and weakness could be forthcoming. Fortunately, feeder cattle have put forth two very clear risk parameters from which traders can position themselves for the next move. $159.90 to the upside and $155.525 to the downside will tip the directional scales if broken and warn of additional strength or weakness in that direction. The range cap would suggest the next move will be lower.

Tregg Cronin can be reached at tmcronin31@gmail.com

Follow Tregg Cronin on Twitter @5thWave_tcronin

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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.

(BAS/BE)

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