Live cattle prices on the monthly nearby futures chart last month rallied to within a couple of dollars of the historical high of $131.05, which was established in March 2012.
Long-term charts, such as the monthly live cattle chart illustrated here, are invaluable for identifying major price trends, as trendlines and formations on a weekly or monthly chart are more reliable than those having a daily time perspective.
The live cattle market has been trending higher, since prices turned up from a low of 78.70 in December 2009. Within the uptrending channel are progressively higher highs and higher lows, which are indicative of a major bull market rally.
Prices are apt to follow a sloping straight line path during the course of a trend and all the fluctuations which compose it. This path is determined by a line drawn across the lows of the reactions during a period of rising prices.
For a trendline to be both valid and reliable there should be at least three points of price contact, each of which coincides with the low of a market reaction. These price reactions, illustrated as points 1, 2 and 3, must bottom at progressively higher levels. Starting the trendline at the second bottom, rather than the absolute low, will generally result in more reliable results in constructing the trendline.
Once a trend develops, it has a tendency to persist. Therefore, it is common for a properly constructed trendline to be touched several times by the fluctuating market during the course of a big move without being penetrated. The longer a trendline remains intact, the more significant becomes its eventual penetration as an indicator of a change in trend.
After a trend is established and a trendline is constructed, a line may be drawn parallel to the trendline depicting the corridor within which prices will fluctuate as the trend proceeds.
In an uptrend, the uptrend line is the channel’s lower boundary and it is constructed first. The upper boundary is the return line; it is drawn parallel and across the highs of each progressively higher advance. The return line points out the areas where reactions to the trend are likely to begin.
If prices start to show an inability to reach the return line, this could prove an important first indication that the current trend is vulnerable to changing direction.
Market psychology: Price activity that lends itself to trendline and channel construction reflects a particular sequence of behaviour. As a new uptrend begins to emerge, "buy" orders materialize, but many are at a limit price under the market. Some of this buying is satisfied on price declines, but a portion of the demand is not — and when prices again begin to move up, some of these buyers will jump in, for fear of missing the move. The balance of unfilled buying will continue to trail the market, in hopes of catching a price reaction.
This buying, as well as that of shorts eager to take profits during periods of downward price corrections, prevents remaining "buy" orders that are too far under the market from being satisfied. Most of these buyers will gradually increase their bids as the market advances.
Some profit-taking emerges when prices rally to new highs, which results in an increase of potential buyers looking to re-enter the market on the next setback. This buying and selling continues until the price finally does turn down for real. This is when trendlines will give way, because the demand has been totally satisfied — or because the volume of selling simply overpowers what little buying interest remains.
The monthly and weekly charts have the advantage of focusing on the big picture, resulting in major opportunities. They should be considered a necessity by any serious chartist or hedger. Send us your questions or comments about this article and chart.
— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.