October lean hog futures’ attempt to rally over the last couple of weeks has run out of gas. Their turning point coincided nicely with technical, seasonal and fundamental resistance. Lets take a look at the combination of factors that could continue to drive this market lower through early September.
Beginning with the long-term chart below, we can point a out a few things that detail the relationship between the commercial traders as reported by the CFTC’ s Commitment of Traders Report and its relationship to the lean hog futures. First of all, notice that lean hog futures have traded in a range between $.50 - $.70 per pound over the last five years, barring the 2013-2014 rally caused by swine flu’s effect on total supply. This basic trading range has served as both support and resistance for the commercial traders as well. Note that each of the bottoms coincided with a reversal of commercial trader activity as commercial packers and processors began locking in forward inputs at discounted prices as evidenced by the net long record set in 2009 which corresponds to the lowest prices in the last 15 years. Conversely, commercial hog farmers have hedged their forward production at each of the recent $.70 highs including a record net short position established during the market’s 2014 high. The last point to take away from the long-term chart is that the commercial trader long hedgers are done buying at these levels and the commercial trader short hedgers are taking over.
|Commercial traders hedging activity controls the value boundaries of the lean hog futures market.|
Shifting from the macro to micro, you can see the full layout of our proprietary discretionary Commitment of Traders, trading screen along with the corresponding COT Signals generated over the last year. This is a mean reversion trading methodology based on the collective wisdom of the commercial traders’ determination of value. Their selling has shifted their momentum to the negative side of the ledger in the bottom pane. First, we only take trades in the direction of the commercial traders’ momentum. Second, we wait for a market to be overbought or, oversold against the commercial traders’ momentum. Hogs had rallied enough to push our short-term momentum indicator into overbought territory. Finally, once the momentum indicator falls enough on a closing basis, the trigger is pulled. This provides two important functions. First of all, it forces us to wait for the market to turn. No catching a falling knife decline or trying to cap a rocket fueled rally. Secondly, the turn provides the swing high against which we’ll place our protective stop loss order.
|Trading signals generated by the discretionary Commitment of Traders program over the last year.|
Commercial hog producers have become bearish at solid technical resistance. Their selling has pushed their momentum into negative territory and the recent decline has provided us with a swing high to protect ourselves against. It is our belief that the lean hog futures market will continue to decline through its seasonally weak period from mid-July through early September and thus provide us with a chance to cover the short hog position near the support levels in the $.50+ area that has been established over the last few years.
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