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Some Myths Should be Kept Alive for as Long as Possible. This Isn’t One of Them

See why some cocoa bulls were caught off guard by the market’s sharp November sell-off

by Nico Isaac
Updated: December 18, 2017

This year, NASA is giving kids the ultimate holiday gift -- i.e., proof of the existence of Santa Claus.

Well, sort of. See, the International Space Station will be passing over the U.S. on Dec. 18 and over the U.K. on Dec. 19, appearing as a large moving beam in the sky visible to the naked eye. If they look up at just the right time, children across the globe can see "Santa's Streak!"

Sometimes, it's a good thing to keep certain myths alive.

Other times, however, it can be counterproductive. Take, for instance, the widely held belief that news events are to financial market price trends what flying reindeer are to Santa's sleigh --namely, the one is driving the other.

Except when it isn't! See, many times, a market's fundamental backdrop is bullish, but prices turn down; or the backdrop is bearish, and prices rally. When this happens, the mainstream experts use words like "anomaly," "aberration," or "defiance" to explain away the scenario.

Take, for instance, the recent performance of cocoa. At the start of November, cocoa prices were on a tear, rallying 20%-plus since April to a 9.5-month high. By November 1, cocoa had completely erased its losses for the entire 2017.

And, thanks to a slew of bullish fundamental, Rudolph the red-"NEWS" reindeer should have sent cocoa prices flying north. Among the raft of supportive data --

  • The start of the holiday season, from Halloween to Valentine's Day: "The U.S. holiday is a candy bonanza and chocolate comes in as the clear favorite. There are signs that the overhang is beginning to ebb as consumers eat away the excess." (Oct. 20 Bloomberg)
  • The longest, continuous drop in cocoa inventories in U.S. warehouses since 2014
  • The spread of crop diseases such as black pod and brown rot: "There are no signs of any improvement in the next quarter." (Nov. 7 Reuters)

Added up, cocoa's deck was primed for gains, as these news items suggested:

"Low prices are the cure for low prices. A combination of improving grinding demand from chocolatiers ahead of the holiday season, over-crowded short positioning, and persistently low prices over the past year has improved the price outlook" (Oct. 20 Bloomberg)

AND

"Every dip could now be a buy." (Nov. 1 Seeking Alpha)

But instead of taking off to the upside, cocoa prices turned down in a powerful sell-off to two-plus month lows.

We don't believe the market's fall was an "anomaly" or "glitch" in an otherwise perfect news-moves-markets formula. In our experience, while news events certainly affect price action of commodity markets, they are not always the main driver. Investor psychology, which unfolds as Elliott wave patterns on price charts, is.

In the case of cocoa, we turn to our November 2017 Monthly Commodity Junctures' "Wave Watch" section. There, senior commodities analyst and master technician Jeffrey Kennedy identified a bearish Elliott wave set-up on cocoa's price chart and prepped the market's downside:

"Ideally wave ((4)) is complete. We still need to fall below the 2032 level. That's what we need to see to confirm this as a tradable top, and more importantly... argue that wave ((5)) within the larger decline that began in 2015 is underway."

Cocoa1

From there, cocoa prices turned down in a powerful sell-off to multi-month lows. Here, our December 15 Daily Commodity Junctures' "Weekly Wrap-up" update brings the price action forward:

Cocoa2

As Jeffrey states in the December 15 Daily Commodity Junctures' video analysis of cocoa:

"Prices have followed their Elliott wave script quite nicely. If we look at the daily price chart, I'll be looking for prices basis the March contract to push to [a specific level]. This will be a good initial objective for the current decline."

If you want to spot "Santa" this holiday, look up!

If you want help with spotting high-confidence opportunities in commodity markets, look to our Commodity Junctures Service.

Patience + Confirming Price Action = Opportunity!

From ICE to CBOT, New York to London, Jeffrey Kennedy leaves no market behind in the search for actionable forecasts -- at just the Right Time.

The result: EWI's Commodity Junctures! This multi-dimensional service includes live video analysis, original price charts, educational lessons, and more, all with one goal in mind -- steering YOU toward high-confidence trade set-ups in the world's most liquid commodity markets.