In the theory of "market fundamentals," bullish news events cause prices in a financial market to rise; and, bearish news events trigger declines. In reality, however, this is not always the case.
Take the Coffee market, for instance. At the very start of 2010, coffee prices were boiling to their highest level in seven months. And, for all "fundamental" appearances, the market had more upside support than the uppermost acrobat in a cheerleading pyramid. Off the top are these early January 2010 news items:
- Encouragement from London: Robusta prices stood at a ten-year high led by "supply concerns and dwindling inventory in Vietnam," which accounts for more than one-third of total exports.
- A poor harvest and lower production in Columbian crops.
- An across-the-board rally in soft commodities such as sugar and cocoa, both of which orbited the outer-galactic 30-year high region.
- A January 6 report from Brazil's National Agriculture Confederation, a lobbyist group for farmers, with this message: Coffee output won't top records as above average rains slow the harvest and damage beans. (Brazil is the world's largest coffee producer).
- And finally, relentless demand from investors, as this January 11 Reuters reports: "The market is to some extent self serving. There's no shortage of coffee but there is a tight enough balance that the funds make up the difference. It isn't an overnight thing. I think it has been building for some time."
Yet, "overnight" the uptrend in coffee ended. On January 11, prices turned down in a powerful sell off to the three month lows we see today.
As for seeing the downside potential in coffee before the tide turned, here the January 8 Daily Futures Junctures Weekly Wrap-up presented the following close-up of the market.
According to the picture above, coffee prices were nearing the end of a classic Zigzag Elliott wave pattern to complete Intermediate-degree wave (2), in blue. (FYI: A zigzag is a simple, three-wave pattern labeled a-b-c, in which wave b is noticeably lower than the start of wave a. And, wave c travels well beyond the end of wave a.)
Two other noteworthy details on the chart above include: The critical resistance level mandatory for maintaining the bearish wave count: 149.50. And, the Guideline of Equality common to zigzag patterns; this states that wave C travels approximately the same distance as wave A. In this case: 146.75.
On January 11, coffee prices rallied into Daily Futures Junctures' (DFJ, for short)cited target to indicate the formation of a peak. There, the January 11 DFJ wrote:
"The three-wave advance has traveled the point of equality between waves C and A. The stage is set for another round of selling... We can still expect it to fall below the late December low of 135.80."