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Commodity Spotlight: How Low Will COCOA Go?
In general, using “fundamentals” to keep the course of the financial markets is a lot like using a compass to navigate on the moon: The needle rarely points in the right direction.
Case in point: the COCOA market circa June 2008. At the time, cocoa prices had skyrocketed to their highest level in 28 years. And, according to the usual suspects, the fundamental backdrop for the sweet soft had more bullish prospects than the Plaza de Toros. To wit:
- “The potential of a weak harvest” + “A possible supply squeeze in the 2008/09 Ivory Coast crop report” = Expectations for the “third global cocoa deficit in a row.” (June 18 Reuters)
- Outbreak of vascular-streak dieback in Indonesia’s cocoa crop (the world’s third largest grower) = a 7% decline in output. (June 17)
- “Strong global demand for chocolate in China and Eastern Europe.” (June 18 AP)
- A lackluster U.S. dollar, which causes “soft commodities to gravitate to higher levels.” (June 18 Reuters)
By all mainstream accounts, cocoa prices had hit the virtual bulls eye. “We haven’t been at these nosebleed prices in years,” began one popular news source. “Especially with the fundamental news coming out. That’s going to really light the fire under this… If [there are production concerns], prices are going to go to the moon.” (June 18 International Herald Tribune)
YET -- Days later, cocoa prices plunged back to earth in a three-month long sell-off that continues to this day.
(Cocoa Sours: In the September 2008 Monthly Futures Junctures, Elliott Wave International’s senior commodity expert Jeffrey Kennedy presents two original close-ups of cocoa that show how low prices are set to go. Act Fast.)
In all of the hulla-BULL-loo surrounding the cocoa market this summer, the June 2008 Monthly Futures Junctures foresaw that the soft market’s rise to 28-year highs was about to end. In the “Wave Watch” segment of the June publication, editor Jeffrey Kennedy presented the following close-up of cocoa:
Jeffrey identified a single zigzag pattern underway: A simple three-wave move labeled A-B-C in which the top of wave B is noticeably lower than the start of wave A. Next, by using the “Guideline of Equality,” Jeffrey knew that wave C often travels the same distance as wave A -- and so an upside target area was determined.
Right in line with Jeffrey’s analysis, cocoa prices rallied into the cited objective, only to reverse course in a sharp decline to seven-month lows.