The lean hog market has frustrated some traders this year and made the year for other traders. It is all about how to read the market properly. Granted, the livestock markets are not always easy to read in my opinion, but they offer some good trading opportunities. The underlying story here is that China lost a large portion of the pork production due to African Swine flu and they need to desperately replenish their supplies. The US is expected to be the main beneficiary.
The road has been a treacherous path this year as indicated on the charts. The chart below should serve as a textbook example in trading and exercising patience. Lean hog prices fell about 30 percent from the peak this year. A bottom was likely to happen at some point, especially with the underlying fundamentals. However, this bottom was not as easy to trade as it appears.
A consolidation or possible bottom was forming in August. This was a sign to look to get long. The market poked above the high end of the range in early September, only to suck in some anxious buyers. Then, the market broke below the lows a few days later only to suck in some anxious sellers and run some stops. The reversal bar on that breakout was a sign the selling was not there, especially as the market moved higher quickly thereafter. Two days of limit up moves broke the market solidly out of the bottoming formation.
Anyone buying this breakout would like to see the market go straight up. However, trading doesn’t normally work like that. The market came back down to test the upper end range where the breakout occurred. This can be a good entry point if you miss the initial breakout, but some traders usually get stopped out at this point when they move their stops to breakeven. Holding that level and moving higher is a good sign. Today, was also a strong technical day as the market had an outside bar and closed at the top of the range.
I like to use outside bars in my trading but they have less significance when they develop within a range like this. However, they are very significant if they occur right before a support/resistance level. The chart below will show the resistance ahead.
The lean hog market closed right on the downward trendline resistance. One could look at this as a selling opportunity. I would expect this market to breakout and have a nice run higher. I think the trend would reverse to an uptrend if this trendline is convincingly taken out.
It is my opinion that the fundamentals warrant higher prices, mainly due to China’s needs. That could change with all the politics and trade war issues. However, China desperately needs pork and the US is the logical solution.
I see the technical picture looking good for lean hogs. There have been plenty of fakeouts along the way to trap and confuse traders. The pullback after the breakout of the consolidation and subsequent move higher was technically sound. This is certainly following the script of a trend reversal. The next major step is to take out the trendline resistance. How the market reacts in the next couple days should be very telling. A failure could make the bulls a little nervous and give the bears more confidence to pounce. However, I am expecting a positive breakout of the trendline and higher prices in the months ahead.
