Anyone watching wheat futures on Monday (July 30) witnessed a sizable market tumble, as the commodity lost 2.4% on the Chicago Board of Trade – its biggest drop in two weeks. Wheat’s slide sent the media scrambling for answers why. And what did they discover?
Well, the spring wheat harvest in the northern Great Plains has apparently produced far more wheat than expected. According to Bloomberg, “some fields may yield as much as 95 bushels an acre, or almost three times the five-year average.”
That’s a lot of wheat. The article goes on to cite weather in the Great Plains – which presented near-perfect growing conditions – as the reason there may be more bread in production (but not in some wheat traders’ wallets).
Mainstream financial analysts believe wholly in the old market theory of supply and demand. You know: If supply goes up, prices go down; if demand goes up, so do the prices. Trouble is, the supply/demand theory only works until it doesn't. If you've been watching the markets for a while, you've seen plenty of cases when markets would rally on the news of a boost in supply, or fall in the face of rising demand.
That's why while the Weather Channel may give you an idea what to expect weather-wise for your fishing trip in the Great Plains, you probably shouldn't base your trading strategy solely on “partly sunny, chance of rain, average high 86.”
This is when the Wave Principle comes in handy – specifically Elliott Wave International's Daily Futures Junctures. With DFJ, you don’t have to spend hours waiting for crop reports and staring at weather maps. Just take a look at the chart below that DFJ's editor Jeffrey Kennedy published in Monday’s edition (some of the labels have been erased for this publication):
Judging by this week's action in wheat, the sell-off may have further to go. But instead of focusing on the weather, Jeffrey concentrates his analysis on a corrective Elliott wave pattern called an Expanded Flat that he's been watching develop in wheat's prices.
Although Expanded Flats are a corrective pattern (A-B-C), they can actually take the market to a new high (or low) as the price progresses in wave B. But, as you can see in the chart above, if you've identified this pattern correctly, it's a "false" high, and the entire wave B should eventually be retraced by the final wave of the pattern – wave C.
So far, Jeffrey's forecast has played out as expected. Time will tell if it continues to do so. You can never be certain when you're trying to forecast the future. Yet with Elliott wave analysis, you at least don't have to rely on such fickle indicators as the weather, or the supply and demand factors, and can focus on objective analysis instead.