Favorable Risk/Reward Buy in Hogs

June 29, 2018 9:41AM CDT

In Mon's Technical Blog we identified 21-Jun's 75.82 corrective high as our short-term risk parameter the market needed to sustain losses below to maintain a more immediate bearish count. Its failure to do so yesterday confirms a bullish divergence in momentum that defines Mon's 73.27 low as the END of a textbook 5-wave Elliott sequence down from 14-Jun's 80.00 high and our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can now be objectively based and managed.
Lean Hogs Aug '18 60min Chart
Lean Hogs Aug '18 Daily Chart

The intriguing thing here is that this bullish divergence in admittedly short-term momentum stems from the extreme lower recesses of the past three months' range shown in the daily (above) and daily close-only (below) charts of the Aug contract where it's not beyond the realm of possibility that the past couple weeks' decline is the completing 5th-Wave "failure" (meaning the 5th-wave did not break the 3rd-wave low which, in this case, is the early-Apr low) of the long-term downtrend from the Jan high. The potential for a "double-bottom" reversal pattern is also obvious.
As always, we cannot and will not conclude a broader base/reversal count based on only smaller-degree strength, but the facts stated above amidst historically bearish sentiment present a compelling base/reversal case that includes smaller-degree risk to levels below Mon's 73.27 intra-day low and/or Mon's 73.67 low daily close. Until those lows are violated, we believe this market is prone to at least another intra-3-month-range recovery and possibly a broader reversal.

On a weekly close-only basis the chart below shows a new and possible completing 5th-wave low below late-Mar's 75.50 low amidst waning downside momentum and some of the most bearish sentiment levels in FIVE YEARS. This condition warns of a vulnerability to higher levels.
Lean Hogs Aug '18 Weekly Chart

On an even broader monthly scale of the most active futures contract below, the market remains deep within the middle-half bowels of its historical range where the odds of continued aimless whipsaw risk should be considered high, requiring a more conservative approach to risk assumption. Herein lies the importance of identifying tighter yet objective risk parameters like Mon's 73.27 low.

These issues considered and while acknowledging commensurately larger-degree strength above 14-Jun's 80.00 next larger-degree corrective high and key risk parameter as the level the market needs to recoup to break this year's broader downtrend, we believe current 74.85-area levels or better provide a favorable risk/reward opportunity from the bull side with a failure below 73.27 required to negate this call and warrant its cover. In lieu of such sub-73.27 weakness we anticipate at least a more significant intra-3-month-range rebound and quite possibly a much more protracted reversal higher. A failure below 73.27 reinstates the bear ahead of what could be steep losses thereafter.

Lean Hogs Monthly Chart

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