Lean Hog Prices at 6-Week Low: 3rd Elliott Wave in Action

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Lean Hog Prices at 6-Week Low: 3rd Elliott Wave in Action
How EWI’s Futures Junctures Service used objective Elliott wave analysis to anticipate the recent decline in hogs

By Nico Isaac
Wed, 25 Apr 2012 16:00:00 ET

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Over the last three months, lean hog prices have gone from “commodity on fire” – TO – commodity in the fire-roasting pit of a 15-month low.

Now, imagine having the foresight of knowing from the get-go that hog prices were about to do a 180-degree turnaround? Well, today I’m sitting down with someone who did: EWI’s chief commodity analyst and Futures Junctures Service editor Jeffrey Kennedy.

Nico Isaac: Back in February 2012, lean hog prices were within spitting distance of their all-time high (set in late November 2011). And, despite a "bullish backdrop" of growing demand from China and falling supplies, the February 2012 Monthly Futures Junctures’ “Featured” segment on lean hogs painted a very different -- i.e. bearish -- story.

Jeffrey Kennedy: Yes. In the February 2012 Monthly Futures Junctures, I built a strong case for a downturn in hog prices based on the fact that a terminating Elliott wave pattern -- an ending diagonal -- had run its course.

There, I presented the following chart of lean hogs that magnified the ending diagonal in action.

Nico Isaac: For Elliott newbies, what is an ending diagonal?

Jeffrey: An ending diagonal is a terminating pattern that signals exhaustion of the larger trend. It exhibits these specific traits:

It unfolds in five waves, wherein each wave subdivides into three smaller waves
Wave 4 ends in the price territory of wave 1
The trendlines that connect the extremes of waves 1 & 3, and waves 2 & 4 converge
Once complete, the pattern introduces a swift reversal in the opposite direction

Nico: How did you know that the ending diagonal had reached its end?

Jeffrey: There were two pieces of evidence that supported my bearish assessment:

The declines since the October 2011 peak had unfolded impulsively. This means they developed in five waves to signal that the trend had turned from up to down.
The advances had unfolded correctively. This means they developed in three waves, were often complex and choppy, and signaled a move that went against the larger trend.

Nico: The next part of your chart and analysis showed a series of one’s and two’s coming off the diagonal's late February high. This set the stage for third-of-third wave selling. Third waves, of course, are the most powerful waves in all of Elliott wave sequence. What was the final nail in lean hogs’ bullish coffin?

Jeffrey: When price action confirmed the bearish labeling. In the days and weeks following the publication of the February Monthly Futures Junctures, lean hog prices beautifully displayed the power and clarity of third-wave selling. Here, the following chart from my April 24 Daily Futures Junctures captures lean hogs’ downturn in action:

Nico: Thank you Jeffrey. What can you tell our readers about what you’re looking for in lean hogs now to signal whether the third-wave decline has reached an end?

Jeffrey: Two words: Price action.

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Tags: Daily Futures Junctures, diagonal, Elliott wave, Elliott Wave trading, fundamental analysis, futures trading, Jeffrey Kennedy

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