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New Year, New Way to Find Solid Trade Set-Ups

A beautiful example from 2016: Cocoa’s crash to a three-year low

by Nico Isaac
Updated: January 09, 2017

"Auld lang syne, my dear. For auld lang syne."

The famous New Year's Eve song asks a rhetorical question: "Should old acquaintances be forgot" just because we're bidding farewell to the past? Of course, not!

But let's say we asked a similar question to just traders and investors -- namely: Should old ways of analyzing market trends "be forgot" as you enter a brand-new year?

Well, in our opinion, if those old ways involve using news and events to anticipate trend changes in the financial markets you follow -- then yes! Now is the time to breakup with mainstream analysis and consider a new way of navigating market changes.

We can tell you how this approach, called Elliott wave analysis, better positions market participants for potential trade set-ups. But we'd rather just show you, using the real-world price action of one of the most popular commodity markets: cocoa.

Let's go back to the middle of 2016. At the time, cocoa was a major contender for world's sweetest commodity. Prices in London were orbiting their highest level in nearly 40 years, while New York cocoa futures kept a six-year high within their sight -- all the while heading into their fifth straight year of gains. This was the market's longest winning streak since 1989.

And, by every external measure in cocoa's "market fundamental," it was primed for further gains due to these "bullish" factors:

  • Supply deficit due to ongoing drought in Cote' d' Ivoire (Ivory Coast) and Ghana, which produces 70% of the world's cocoa
  • A 4.6% drop in global cocoa production from the preceding 12 months, said the International Cocoa Organization
  • A plunging British pound, following the June 23 Brexit vote
  • And demand outstripping supply: A July 11 report showed cocoa stockpiles relative to consumption, the so-called stocks-to-use ratio at lowest in 31 years. (Bloomberg)

Wrote one July 8 news source: "Against a backdrop of supply shortages, speculative money may be flowing into [cocoa] as a commodity with upside potential." (Nikkei Asian Review; bold added)

That, dear readers, was the old standard way of anticipating the market's future by looking strictly at its external conditions.

Elliott wave analysis, on the other hand, dug much deeper, into the technical conditions unfolding on a market's price chart. There, in our July 2016 Monthly Commodity Junctures, senior analyst Jeffrey Kennedy identified several bearish developments on cocoa's long-term price charts, all of which confirmed the market's larger trend had changed from up to down (bold added):

"If we look at the weekly prices chart, notice ... we've seen a decisive break of a trendline -- the lower boundary line of the corrective price channel. And then we've seen prices test the underside of that trendline. This is referred to as a pullback, and it occurs in a down trending market ... This is one of the reasons I wanted to discuss this market specifically in this month's Monthly Commodity Junctures' video newsletter.

"What this does is confirm the counter-trend price action that's basically been in force since January of this year is finally complete and we can now anticipate this larger wave three sell-off targeting at least 2194.

"These are very exciting price charts, and moreover, I like the way we're seeing pretty much the same message derived not only from our Elliott wave patterns but also by the momentum indicators and oscillator as well.

"Ideally by the end of August, we're trading 2500, 2400. That's the kind of price action we would need to see to confirm the larger interpretation in this market for a decline back to below 2034."

What happened next can best be described as one of the swiftest and strongest crashes in cocoa's recent history, as prices reversed from a multi-year high in July to a three-year low in January 2017:

So, with a brand-new year upon you, it's time bid goodbye to the "old" ways of seeing the world's leading financial markets AND hello to an entirely independent perspective.

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