In the last several sessions, December live cattle were consolidating before the strong surge Friday posted an outside reversal higher.
Prior to the late-week jump, momentum indicators have been rising, especially the stochastic measure of momentum. The indicator has not yet moved over 80, nor is it diverging from price, suggesting the move still has strength and conviction to move higher.
On-balance volume (OBV) suggests bears have been firmly in control of price action the last 20 sessions, as that indicator finished last week with a reading of 73,125 contracts, just off the lowest level posted since early August. However, the indicator is turning higher, and managed funds were still carrying over 75,000 net-longs, according to the most recent Commitments of Traders report, highlighting their vested interest in higher prices. From a longer-term, continuous perspective, the uptrend is still very much intact, dating back to the May lows. The price should revisit the $119.75 highs from early October.
Lean hog prices posted a nice recovery from Monday's (Oct. 22) low, which saw values at their lowest levels in a month and a half. In the process, hogs recovered back above their 50-day moving average with the 100-day just overhead at $59.878.
From an hourly perspective, the December contract has a quasi-inverted head-and-shoulders pattern, which would argue for higher to much higher prices in the days and weeks ahead. However, this pattern is complicated by the sharp sell-off at Monday's (Oct. 22) open. Otherwise, until the contract can prove otherwise, prices are likely to consolidate further inside the $51.275 to $59.95 range.
Momentum indicators are strong and not yet diverging from price, although should we rally back toward $59.95, traders should be mindful of any sort of bearish divergence in even short-term momentum. Bears are still in control of volume with bearish OBV values, although managed funds are still net-long 28,265 contracts. No great conviction outside of additional rangebound trade in the near term.
In our last Technically Speaking update, for the feeder cattle market, we were concerned about the waning and diverging momentum as the November contract made another rally attempt at the $159.90 highs. That caution proved to be well-founded as prices sold off swiftly in the weeks following. Since then, price has found solid underlying support just above the 200-day moving average of $147.56 basis the January contract on a continuous basis.
Momentum indicators have bottomed and are now rising, and the gap left from the contract roll is a natural target. Volume is on the side of bulls over the last 20 sessions, although only by the slimmest of margins as OBV closed at +1,215 on Friday (Oct. 26).
From a longer-term perspective, feeders are still locked inside their $130-to-$160 range with prices just above the midpoint of that range. This makes a strong directional bias from here a bit difficult because aimless, whipsaw trade from the center of the range can and usually does occur. We also have our eye on a possible head-and-shoulder reversal pattern, which could produce severe losses back to the lower end of the range if confirmed. Shoulder one would be around the $154.925 area from July, the head at $159.90 from September, and shoulder two forming at current prices. The neckline would be somewhere around $145 to $147 with a downside projection of $133 to $135 if confirmed. This pattern would still be weeks in the making, if it occurs at all, so is something to monitor from a distance.
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 firstname.lastname@example.org
Follow Tregg on Twitter: @5thWave_tcronin
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