Today I sit down with Elliott Wave International's chief commodity expert Jeffrey Kennedy to discuss which market makes the biggest bip on the radar of near-term opportunity.
Nico Isaac: A little bird told me that of all 13 Elliott Wave patterns in existence, the one you most enjoy "playing" is the triangle. Is that true, and if so, why?
Jeffrey Kennedy: You're feathered friend was right. Triangles are my favorite wave patterns, especially the "Contracting" variety. As for why -- think plumbing. In the last week, Georgia temperatures went from the mid-60's range to below freezing. For many unsuspecting homeowners, water in pipes that contracted during the unseasonable warmth suddenly expanded with the cold front, resulting in a powerful explosion of bursting pipes.
That's a lot like the behavior of contracting triangles.
Nicole Isaac: Sounds like a blast! So, what does a contracting triangle actually look like on a price chart?
Jeffrey Kennedy: The diagram below offers an ideal model – both the bull and bear market variety. In short, a contracting triangle is a sideways price move that consists of five waves labeled A, B, C, D, and E.
The longer prices trade sideways, the swings within this move get smaller and smaller (The market contracts). Once wave E of our imaginary triangle is complete, prices then thrust out of this pattern in a fit of excitement.
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Nico Isaac: Do triangles occur near the start of a trend?
Jeffrey Kennedy: Great question, as it raises the most important feature of triangles: They can ONLY form as waves 4, B, or X -- in other words, triangles always precede the final move in a wave sequence. That's why they imply a dramatic move ahead.
Nico Isaac: So, in the January 16 Daily Futures Junctures "Weekly Wrap-Up," you presented the following price chart of sugar which shows a huge, multi-month contracting triangle underway since 2007. (Some Elliott Wave labels have been removed for this publiction)
And, in the January 20 Daily Futures Junctures, you revisit that chart in greater detail and explain where and when the current leg up should end. How did you determine the potential upside target?
Jeffrey Kennedy: My current labeling puts us in wave ( c ) of the larger triangle pattern; and, according to the Elliott Wave Principle, c waves usually retrace .618 of the preceding wave of one larger degree.