by Nico Isaac
Updated: October 30, 2017
Back in late September, hog prices were getting slaughtered, circling the drain of fresh contract lows.
And, unlike some market mysteries that seem to come out of nothingness -- the mainstream experts pinned this move soundly on one main factor:
The September U.S. Department of Agriculture report, which dropped a grade A bearish bombshell on the lean hog market. To wit: thanks to the recent addition of two new slaughterhouses in Iowa and Michigan, the U.S. hog herd stood at its "highest level for the September quarter since the government began tabulating the data in 1988." (Reuters)
Explained one analyst: "There's too many" hogs.
It was the perfect bearish fundamental setup: Oversupply + average demand = falling prices. Except, instead of continuing lower, hog prices turned up in a powerful rally to two-plus month highs on October 26.
Due to its defiance of overtly bearish forces, one news source penned the upsurge in hogs as the "October miracle" (Oct. 25 The Pig Site), while another suggested hog prices continue to "defy gravity" (Oct. 23 National Hog Farmer).
We'd like to toss another explanation into the pen; namely, there's nothing supernatural about the recent lean hog rally. In fact, the move up is a natural part of its Elliott wave script.
Let's go back to late September, when all the hullabaloo surrounding the bearish USDA hog herd report hit the press. At the time, our senior commodities analyst Jeffrey Kennedy identified a potentially bullish Elliott wave setup on several price charts of lean hogs.
In his September 22 Daily Commodity Junctures, Jeffrey exercised caution, stating how the market was "in a kind of holding pattern," but a "bullish momentum picture" had him "focused on the upside." In Jeffery's words:
"I like what I'm seeing here. Any kind of price action above the say 60 or 61 handle looks good to me."
Soon after, lean hog prices rallied above the 60/61 handle, strengthening Jeffrey's confidence in the upside. In his September 29 Daily Commodity Junctures, he prepped the stage for higher prices:
"We're on a tear to the upside. I like the fact that the market has moved up with as much volatility as it has.
"A big, sustained move above the upper boundary line of the base channel -- that's what is required to confirm the presence of third wave price action."
Again, lean hog prices followed Jeffrey's Elliott wave script, rallying above the upper boundary line of the base channel -- and soaring to the two-plus month highs we saw on October 26. The full extent of the move is pictured below:
When it comes to trend changes in commodity markets, there are no such thing as miracles. There is, however, such a thing as observable Elliott wave patterns on price charts which identify high-confidence trade setups -- before they occur.