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By Matthew Bradbard

Lean hog futures (August contract) are up 5.4% after putting in a bottom at 88.70 on May 17. We're now trading at 3 ½ month highs, putting this market into overbought levels. As of this post it appears buyers are showing signs of fatigue as we have a potential triple top at the recent highs of 93.60/93.70.

I'm recommending short exposure. So, why jump in front of the Lean Hogs Express?

I'm seeing consolidation after this steep run-up, a sign that an interim top may be near. Weak packer profit margins and the suggestion of a potential seasonal top have set a negative tone, but confirmation is needed.

In 2012, a seasonal high was made just above current levels, at 97.725, in the first week of July. Then, over the following nine weeks futures fell 28%. Past performance is not indicative of futures results. Cattle and hogs are quite different markets, but the negative tone in cattle in recent weeks could cause spillover weakness in the livestock complex. The USDA projects that Q4 pork production will come in at 750 million pounds above Q3, potentially making it the second highest increase on record. If we get this increased supply, without a significant uptick in demand, I'll view this as a very bearish development.

(click to enlarge)6-4-13 LH

Many factors need to be considered when constructing a trade - the two most crucial, in my opinion, being:

1. Risk control - How much am I willing to lose if I'm wrong? And, at what price will I know I'm wrong?

2. Profit target - At what price will I lock in gains? And, is the potential gain worth the risk? If you are risking $1 to make 50-cents, look elsewhere.

Looking to the risk side, futures traders can sell lean hogs futures with a stop loss exit above resistance (yellow line). And depending on the exact placement of your stop, the risk would be around $400 to $500 per contract. Keep in mind: markets can gap on the open, or get locked limit up/down, so a stop loss does not guarantee your exit price.

As for potential profits, a settlement under the pivot point (red line), which had served as resistance for three months before last's week breakout, would signal confirmation that a retracement is underway. Use the support level (green line) as your ultimate profit target. A trade back down to 89 cents (August contract) represents a potential gain of $1,800 per contract.

With this trade, you're looking at a 7:1 risk-to-reward ratio. I'll take that any day of the week.

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions ("forex") before making any trades. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.

Source: Lean Hogs: The Other White Meat