This post is a follow up from our September 22nd post – Cattle Technical Analysis.
Although it is taking longer than we would like, everything is still going to plan with the cattle futures price outlook. After carving out the suggested top in previous posts, price action has mapped out a clear, initial 5-wave decline in Wave A, then countered with a deep retracement in Wave B; however, prices never violated the critical resistance for the interpretation ($114.05).
This sets the stage for another decline in Wave C of (2). Look for prices to target the 102.60-105.20 area. These levels are defined by the common Fibonacci retacements of wave (1) and the Fibonacci multiples of Wave A. In addition, the previous fourth wave of one lesser degree terminated near $102.05, increasing the probability that prices will fall to the 50% retracement level ($102.60 on a close only chart). If/When this occurs, it will be an excellent opportunity to add long coverage to a position.
We believe the long-term bottom is in place. However, even if we were wrong, and the previous rally from April to mid-August was proven to be wave (A) of an (A)-(B)-(C) correction, we should still see a new price extreme to the upside (in a wave (C)). This makes buying the retracement a lower-risk, high probability proposition.
Getting a closer look at the hourly chart, you can see the clear subdivided waves and the expected zig-zag price action. Critical resistance for this interpretation is well defined. If we can take out the previous swing low of $109.80, that will build confidence in the forecast. Targets include the $105-area and then $102.5-area. The level of $105 is clustered by the Fibonacci mutliple of where Wave C = 1.382*Wave A and the 38.2% retracement of larger Wave (1).
The $102.50 area is clustered by the 50% retracement of Wave (1) (a more common occurrence than 38.2%). Moreover, it’s closer to the terminus of the previous 4th wave of one lesser degree (guideline of depth of corrective waves). If/when this occurs, it will be important to analyze slope and momentum to add confidence in stepping into a market that will feel like it is making new lows.
Combining With More Widely Used Technical Indicators
Prices have finally broken below the midpoint of the Donchian channel. This bolsters our confidence in the forecasts. It should be noted that the Donchian channel coiled a bit in recent times; this is often a precursor to price and volatility expansion.
On the price rally in Wave B, RSI failed to get above the 60 level, confirming the intermediate downtrend is still intact. Minor bearish divergence in Stochastics with RSI staying below 60 on the counter-trend rally is a nice sell signal.
Looking at our multiple moving average chart, you can see that prices have accelerated below all the moving averages (5-day through 60-day) and the shorter-term MA’s are now sloped lower with the long-term ones flat. That being said, the ADX is in dormant territory, suggesting moving average systems are less reliant. If we get continued downside price action and the ADX rises above 20, it is often a sign that a persistent price trend is beginning; however, that is not expected given our outlook that this price decline is a buying opportunity within a larger uptrend.
The market is giving signals to be short this market. The “trend is your friend” and it appears the intermediate downtrend is re-establishing itself. Using the rules of Elliott wave theory, the market shows a clear, well-defined critical resistance level to which short positions can measure risk against downside forecasts (opinions).
Taking the long-term view, our interpretation is that the long-term trend turned higher earlier this year and the longer-term bottom is in place. If/when we get a price retracement back to the 103-105 area in wave C, and momentum is waning, it will be an excellent opportunity to add long coverage.