"Oversold" Means Nothing in Resumed Hog Collapse, But New S-T Risk Level May be Key

September 28, 2016 10:37AM CDT

DEC HOGS

Yesterday's resumption of the secular bear trend below the past week's 47.62-area support leaves yesterday's 49.30 high in its wake as the latest smaller-degree corrective high and new short-term risk parameter the market is now minimally required to recoup to even defer the bear, let alone threaten it.  In this regard 49.30 becomes our new short-term parameter from which the risk of a still-advised bearish policy can be objectively rebased and managed.  For reasons we'll discuss below however, this admittedly tight risk level could be a key early indicator to a base/reversal environment that could be major in scope.  Former 47.62-to-40.05-range support would be expected to hold as new resistance if the bear still has a lot further to go.

Lean Hogs 60 min

 

Lean Hogs Daily

Only a glance at the daily (above) and weekly close-only (below) log scale charts is needed to see that the trend is down on all scales.  In fact, the weekly chart below provides the latest example of the total uselessness of referring to a market as "oversold" (or "overbought" in a bull market).  Traders are reminded that the momentum indicator "tail" never, ever wags the underlying market "dog".  Yet, and despite our soapbox view of this matter over the years, such references remain rampant in our industry.  Such "oversold" references are flat out wrong and should be ignored.

What DOES matter relative to momentum is PROOF of a bullish divergence that, in fact, breaks the simple downtrend pattern of lower lows and lower highs.  And this proof, quite simply, comes in the form of a market's failure to sustain losses below a recent and specific corrective high.  Currently, we have defined that high at 49.30.

In terms of navigating a prospective end to the clear and present downtrend, we find it very interesting that:

  1. the decline from 01-Sep's 58.32 high looks to be a textbook 5-wave Elliott sequence as labeled in the daily chart above and hourly chart (top)
  2. this week's Bullish Consensus (marketvane.net) eroded to 24%, its lowest reading since that that warned of and accompanied Nov'15's base and reversal
  3. the decline from 01-Sep's 58.32 high has spanned an identical length to Jun-Aug's preceding 67.32 - 53.55 decline (i.e. 1.000 progression);  this same 1.000 Fib progression is also in evidence on the weekly log close-only basis below

If there's a time and place for this market to bottom, these factors warn us to be watchful for proof of "non-weakness" from the area around today's 46.27 low.  HOWEVER, NONE of this base/reversal speculation matters one bit until and unless this market confirms AT LEAST a bullish divergence in short-term momentum above 49.30.

These issues considered, a full bearish policy and exposure remain advised with strength above 49.30 minimally required to defer or threaten this call and warrant a move to the sidelines by shorter-term traders with tighter risk profiles and pared bearish exposure by longer-term players.  In lieu of such 49.30+ strength further and possibly steep losses remain expected.

Lean Hogs Weekly

 

DEC CATTLE

Yesterday's relapse below Fri's 104.10 low reaffirms at least the intermediate-term trend as down and leaves Fri's 107.15 high in its wake as the latest smaller-degree corrective high and new short-term risk parameter this market is now required to recoup to stem the slide from 22-Sep's 108.90 high and render it a 3-wave and thus corrective affair consistent with a broader BASE/reversal-threat environment.  This risk parameter may come in handy given the market's recoil to the lower-quarter of this month's 101.275 - 108.90-range that would fully be expected to hold IF early-Sep's rally was just an initial one within a broader base/reversal PROCESS.  In lieu is such 107.15+ strength and against the backdrop of the secular bear trend, a resumption of that bear to new lows below 101.275 should hardly come as a surprise.

Live Cattle 60

 

Live Cattle Daily

The magnitude of the secular bear trend is clear in the weekly log active-continuation chart below.  Given the market's rejection of a 50% retracement of Aug-Sep's 116.65-to-101.275-portion of this bear in the daily chart above, it's easy to chalk up Sep's recovery attempt as a mere correction within the still-dominant bear.  IF, alternatively, waning downside momentum and historically low levels of bullish sentiment are evidence of a base/reversal environment that could be major in scope, the proof is in the proverbial momentum pudding; specifically, a recovery above at least 107.15.

These issues considered and despite the prospect for a major base/reversal environment, a cautious bearish policy remains advised with strength above 107.15 required to not only negate this call and warrant its cover, but also reinforce a base/reversal environment that could be major in scope.  In lieu of such 107.15+ strength, further and possibly steep losses should not surprise.

Live Cattle Weekly

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.