We need to keep a close eye on August lean hogs Monday morning after it established bearish technical signals and patterns late last week. August hogs posted a new contract high of $120.55 on Monday, June 7 before falling to a new 4-day low of $116.25 Friday before closing at $116.975, down $1.725 for the day and $0.60 lower for the week. Last week’s activity established a bearish spike reversal on the contract’s weekly chart, confirming the secondary (intermediate-term) trend has turned down, a move signaled by a bearish crossover by weekly stochastics above the overbought level of 80% at the end of the previous week. Last Friday saw the August-October futures spread close at $20.375, continuing to reflect an incredible bullish short-term commercial outlook, though the spread has weakened from its recent high weekly close of $22.15 (week of May 24). Given the bullish fundamentals, the downside target area for the new secondary downtrend would be $101.60 to $95.74, the 38.2% and 50% retracement levels of the previous secondary uptrend from the contract low of $70.95 through the contract high of $120.55. The previous 4-week low is at $104.375 (week of May 17).
Theoretical Position: Spike reversals have not proven to be the most reliable of patterns over the last year, particularly in markets with bullish fundamentals like what is seen in lean hogs. However, those with hogs to sell over the summer could look at pricing some near last Friday’s close of $116.975. Seasonally, August lean hogs tend to trend down during the summer according to both the 5-year and 10-year indexes. Deferred contracts (e.g. October, December, and February) did NOT see a bearish spike reversal on weekly charts last week, indicating if a new downtrend does develop it is only in the August contract.