Over the last few months, wheat prices have gone from royal grain "high"ness -- to -- royal pain lowness. From its late April peak, the market has endured a 20% sell off to its lowest level in ten months.
For many mainstream financial analysts, wheat's sustained slide has come as quite a shock. Pre-fall, the grain had enjoyed a powerful, four-day winning streak when prices had soared a shocking 9%.
At the time, net short positions for wheat were at the second lowest level in six years. Not to mention the fact that wheat's "fundamental" backdrop was running over with these and more bullish factors:
- European wheat inventories at the end of the 2010-2011 season were 2 million tons less than the minimum needed to supply the market until next harvest.
- Poor outlook for US plains states such as Oklahoma and Kansas due to continued forecasts for dry weather.
- US Department of Agriculture report rated only 36% of US winter wheat crop as good-to-excellent versus 69% a year ago.
In the words of one April 23 MarketWatch article:
"The US doesn't have enough acres to produce the record crop we need. We really can't afford another bad year and continued adverse weather will push this along further."
Yet, instead of the highly anticipated "push further" to the upside, wheat turned down.
The fact is, while financial markets repeatedly ignore, shrug off, or go entirely against their "fundamental" forces, they often adhere to their underlying Elliott wave patterns at such moments. And, on April 26, EWI's Commodity Specialty Service analyst Peter DeSario went on high alert to wheat's downside potential via the following chart and insight:
"It still looks like prices may see a larger decline carry below the March low. The action from the 691 low of March 16 has been followed by a corrective action, a double zigzag wave X that will be followed by another decline."
(Editor's note on the definition of a Double Zigzag: A zigzag is a simple three-wave pattern labeled A-B-C. It has a 5-3-5 subwave sequence, whereby the top of wave B is noticeably lower than the start of wave A. Occasionally, zigzags will occur twice or at most three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening "three" or "X" producing what is called a double zigzag.)