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Commodities: Staying on the "Bike" to Opportunity

How Elliott wave analysis helped you stay ahead of coffee's trend changes

by Nico Isaac
Updated: September 26, 2017

A long-time investor friend of mine once remarked that "navigating trend changes in financial markets is like learning to ride a bike as an adult."

He then added this afterthought: "Navigating those changes in commodities is like learning to ride a bike as an adult... blindfolded, with one arm tied behind your back."

It's true. Commodities can be tougher to forecast than, say stocks. In agricultural commodities, supply is constantly being surveilled by mainstream pundits, who cite every possible factor that may or may not alter supply, such as: crop diseases, worker strikes -- and weather patterns.

The problem is, rather than illuminating the market's future trend, often changes in weather are used to retroactively explain price action that has already occurred.

Take, for example, these recent news items regarding coffee prices:

As coffee prices rose, pundits insisted a bullish, drought-like scenario was going to continue fanning coffee's upside:

  • "Arabica Coffee Climbs to 5-Week Highs... boosted by concern that dry weather in Brazil could affect next year's crop" (Sept. 19, Reuters)

But then, just days later with drought conditions still persisting! -- coffee prices inexplicably fell. And, I kid you not -- now, the explanations shifted to how every new day of drought puts us closer to the day when the drought finally ends:

  • "Arabica Coffee Falls as Rains Seen Boosting Brazil Crops. The level of confidence is growing as each day passes that the rain will actually arrive." (Sept. 24, Reuters)

Any questions?

See, we believe commodity markets do react to certain events like weather conditions -- temporarily. But those events are secondary to a more sustained force; namely, investor psychology, which unfolds as Elliott wave patterns on a market's price chart.

Let's go back and review coffee prices again, but this time, from the perspective of our chief commodities analyst Jeffrey Kennedy. In the August 2017 Monthly Commodity Junctures' "Wave Watch," Jeffrey identified a near-term bullish set-up developing on coffee's price chart and prepped subscribers for a meaningful turn up:

"Short-term, as we move into next week, I'll be looking for a low to form in the coffee market somewhere near the .618 retracement of this wave 1 advance [at 127.20]... and then at that point, I will be looking for signs of strength.

"The next few trading days are going to be very important and ideally we'll see some type of reversal to the upside."

Days later, coffee prices bottomed near the Fibonacci retracement level cited in Jeffrey's analysis and turned up in a powerful rally. Weeks into its uptrend, in the September 15 Daily Commodity Junctures, Jeffrey published the following chart of coffee, which showed prices nearing a topping point:

Again, days later, coffee followed its Elliott wave script and began to fall. Here, the final chart captures the two movements in real-time.

The truth is, it's hard not to fall off the "bike" to opportunity when navigating the volatile world of commodities. But it's never too late to try the "training wheels" of Elliott wave analysis.

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