The lean hog futures have been in an uptrend for the past month and a half. Along the way it has illustrated a number of points about technical analysis and chart based trading. Let’s take a look at the chart to see what lessons there were in it.
Hogs have been in a two year decline; there was a sharp decline in July as swing flu fears peaked. December hog futures made a low on August 12th; I drew a blue horizontal line to show how it then acted as support. (Obviously, it wasn’t clear on that day that a low was being struck).
The bar labeled “A” was August 18th. This turned out to be a significant day. An intraday attempt to take out the 8/12 low failed, the daily range was very large, and it ended in a doji. All this combined to signal that the bears had lost control of the market.
A rally ensued; the length of the trendline and number of touches illustrate how strong the trend became.
Sept. 16th (bar “B”) proved to be a blow off top. Following a strong rally the previous day, hogs gapped higher on the 16th, only to fall back and close lower (an Oops sale; read about them here). Following a consolidation day on the 9/17, the downside resumed on 9/18.
Sept. 21 (Bar “C”) saw the first break of the up trendline, which was at least a warning that the uptrend was in trouble. (If a trend is strong, one move through a trendline won’t invalidate it, especially if it’s an intraday move only. In this case, it was a close below, so it was a stronger signal.). Note how after the trendline was broken, it then served as resistance for Tuesday and Wednesday
Yesterday’s bar is labeled “D”. Yesterday was significant because yesterday’s low of 48.15 was a successful test of Fibonacci retracement support at 48.088 This level is a 50% retracement of the rally, so it is an important support level. Also not that yesterday’s rally went up and tested the broken up trendline.
Looking ahead, the intermediate term trend has two possibilities, as I see it. For the bearish case, a renewed decline that leads to a break of the 50% retracement support could generate a bearish MACD crossover and a retest of the August low. For the bullish case, holding the Fib retracement support could allow the rally to extend. 50.625 is retracement level resistance; it also lines up with the broken up trendline. Clearing that resistance could lead to a retest of the rally high at 53.100 and a potential large 123 bottom.
Lots of clues
I like using technical indicators, but using chart setups and patterns themselves should be a cornerstone of a trader’s analysis. Learning to use them can give you revealing insights to price action.
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