Technically Speaking

Weekly Analysis: Fat Cattle Topping, Hogs Rangebound

February live cattle gapped lower last week between $124.20 and $124.50, creating a potential exhaustion gap. This, combined with a potential bearish divergence in momentum, has indicators pointing down moving forward.

Live cattle futures appear to have finally put in an intermediate-term top with the price action of the last week. Looking first at a front-month continuous chart, we see a gap lower on Jan. 2, between $124.20 and $124.50, after price made 11-month highs. With the gap occuring in the opposite direction of such a drawn out uptrend, we would be inclined to call this an exhaustion gap, even though it wasn't technically an exhaustion of buying at the end of an uptrend. Nonetheless, moemntum indicators, such as stochastics, show a clear divergence from price as the contract rallied to new highs on declining and diverging momentum. Panning out to a weekly perspective, the reversal looks even more ominous, especially up against resistance from the April highs. The momentum divergence looks even more impressive on an active-continuation chart. In trying to judge how severe a correction could be, we would point to the 38.2% retracement of the entire $101.375 to $125.575 rally at $116.33. To be clear, the uptrend is technically still in place, but price action this week will tell us how solid the recent highs will be as a new resistance candidate.

After the break from the November highs, lean hog futures have consolidated and rallied off of the 38.2% retracement of the $47.825 to $69.500 at $61.220. The bounce has allowed futures to reclaim the 50-day moving average with price now buffered between the 50- and 200-day averages. The 200-day moving average at $64.64 looks like a near-term resistance candidate, while the corrective lows at $60.20 surface as near-term support. More broadly, it looks as though the $60.00 to $70.00 range will continue to contain price action moving forward. Feb hogs are still respecting the trend-line support dating back to the October and November lows, keeping ideas rising for near-term strength.

Using an active-continuation chart of feeder cattle, we see price having traded to the lowest levels since June last week. Running a retracement analysis from the $128.875 lows from last April to the $159.90 highs from September shows price has now traded through the 50% retracement level at $144.387. The 61.8% retracement level sits down at $140.727, which looks like a decent objective. Momentum is in a sharp downtrend, showing no semblance of price bottoming or divereging. The last week of price action has also pushed futures below the 50-day, 100-day and 200-day moving averages with May being the last time price was below all three at the same time. This confirms trends as down on all applicable scales. We would warn against expecting a retracement level, such as the 61.8% at $140.727, to stop price losses as these merely contrived support candidates do not replace previous price action as solid support candidates.

Trends are lower and should expect to continue until price can recover above a former corrective high, such as the $147.475 level from last week.

Tregg Cronin can be reached at tmcronin31@gmail.com

Follow Tregg Cronin on Twitter @5thWave_tcronin

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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