Technically Speaking

Technically Clear Cattle

Source: DTN ProphetX

Back in the day, using technical charts to project possible targets in the livestock markets was like trying to nail jello to a wall -- largely ineffective. This was due to in large part to livestock futures being driven by underlying cash markets, rather than the reverse like most other commodities. But as I discussed in Monday's weekly livestock sector analysis, the cattle markets in particular are holding true to a number of classic technical patterns. Or in other words, the nature of the beasts seems to be changing.

Take a look at the weekly chart for April live cattle. If you squint your eyes just right and use your imagination, you might see the same Elliott Wave patterns I do. Keep in mind that I use only the loosest form of Elliott Wave analysis, not necessarily being a stickler for each and every rule being followed. Chaos Theory implies that there is little chance of any pattern being perfect. Also keep in mind that there is a solid connection between Elliott Wave Theory and Dow Theory's retracements of 33%, 50%, and 67%, as you'll see in the following analysis.

Start with the contract low of $130.20 posted the week of November 25, 2013. In this case, Wave 1 lasted until the initial peak of $158.85 the week of July 28, 2014. Classic Elliott Wave Theory states that Wave 1 is usually the shortest of the five waves, but not in this case. Bullish fundamentals worked to skew the pattern without changing what the market has been telling us. Wave 2 was the sell-off back to $149.10 the week of August 18.

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Let's pause here to make a couple of interesting observations. Note that the series of highs from the week of June 30 through the week of July 28 that capped Wave 1 centered around what would ultimately become initial support near $157.50. This price marks the 33% retracement level of the uptrend that would eventually extend from the contract low to the contract high of $171.10. Similarly, the series of lows near $149.00 were near what would eventually be the 50% retracement level of $150.65.

Wave 3 saw the market resume its uptrend from the $149.10 low to a peak of $167.975 the week of October 6. Again, classic Elliott Wave Theory describes the third wave as "the longest and most dynamic". Yet this time around it wasn't to be. Likewise, it's said of Wave 4 that it is "usually a complex pattern". But not this time, as this particular Wave 4 lasted about as long as the blinking of an eye, coming to an end the following week with a low of $159.90. Wave 5 concluded at the previously mentioned contract high of $171.10 posted the week of November 17.

A five-wave uptrend is then followed by a three-wave downtrend, broken into wave A, B, and C. Wave A saw April live cattle spike to a low of $154.875 the week of December 15, below the previously mentioned 33% retracement level near $157.50 before rallying back above this mark to close at $159.675. Wave B saw the contract rally to a high of $166.00 the week of January 5.

Note that this was a solid test of resistance near $165.70, a price that marks the 67% retracement level of Wave A. Keep in mind that a market with bullish fundamentals, still the case in live cattle as indicated by the April to June futures spread, tends to retrace sell-offs by 50% to 67%, and previous uptrends by 33% to 50%.

In regards to the latter, what then might the low be for Wave C? If a fundamentally bullish market tends to see at maximum a 50% retracement of its previous uptrend, then Wave C could find its low near the same mark that held Wave 2 -- $150.65.

The key to the live cattle market, as well as what was shown in the feeder cattle chart last Monday, is that it is clearly following its technical signals without losing connection to its underlying cash market. Fundamentals, again using spreads, set the retracements that have been acting as targets for each wave of this trend pattern.

To track my thoughts on the markets throughout the day, follow me on Twitter:www.twitter.com\Darin Newsom

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greg schimkat
1/14/2015 | 9:10 AM CST
One man's cycle is another man's Kawasaki.