This Commodity Is "Liquid Gold" -- The Kind of Gold That Grows on Trees
It just soared to 3-year highs. But falling temperatures did NOT cause OJ prices to rise
by Nico Isaac
Updated: September 07, 2021
When it comes to commodities, nothing explains "fundamental" market analysis better than the 1983 cinematic comedy "Trading Places." Like the movie says,
"Commodities are agricultural products... like coffee that you had for breakfast... wheat, which is used to make bread...frozen orange juice and gold. Though, of course, gold doesn't grow on trees."
Now comes the movie's plot twist. Two grifters take down a multi-gazillion-dollar investment firm Duke & Duke by slipping them a fake "insider" crop report on orange juice, one that showed a record surplus. This prompts the firm to short the market in anticipation of falling prices. But when the real report comes out the next day showing the true numbers -- and a record deficit -- Duke & Duke loses millions in a massive buying spree.
The movie is a made-up story with paid actors, but the logic behind the plot -- namely, that "fundamentals" are key to commodity prices -- persists within modern mainstream market analysis, which says: Supply and demand rule the trends; period/full stop. Which means, if you knew these numbers in advance, you could accurately predict whether prices were going to rise or fall.
Take, for instance, the orange juice market today. This chart shows that, since March, OJ prices have been sweeter than a ripely-squeezed Valencia orange.
One July 12 Commodity.com article called orange juice "liquid gold," while this July 28 Investing.com piece spelled out how strong its rally has been.
The article cites several factors for OJ's rally, the leading contender being:
"A deep freeze that has set into the orange groves in Brazil, the world's largest grower of the fruit as well as producer of citrus juices."
This logic makes total sense until you look at the timeline. Brazil's winter officially starts on June 21.
Yet, OJ's rally began three months earlier, in March!
Which means, the winter-affected crop report was not a predictor of OJ's price gains; but rather, a mirror of a rise that was already well underway.
Now, let's do our own "Trading Places" switcheroo for a minute. When we swap out this "news-moves-market" analysis for Elliott wave analysis, we see that OJ's comeback was foreseeable from the very beginning.
Here, we go back to our March 25 Daily Commodity Junctures, where editor Jeffrey Kennedy identified a specific chart pattern underway on OJ's price chart: an Elliott wave triangle.
This pattern, pictured here, is a sideways move labeled A B C D E. Triangles are, in Jeffrey's words, "the market's way of letting you know the party is almost over." Once complete, they are followed by sharp moves that carry prices in the direction of the previous trend.
On March 25, Jeffrey labeled the finished A B C D E triangle on OJ's chart and said:
"We favor an imminent market bottom in Orange Juice at little under the 109.65 Thursday low. Price eclipsing 119.60 structural resistance will forcefully bolster this Bull view."
From there, OJ prices indeed formed a bottom and began a powerful rally to multi-year highs we see today.
Supply and demand do play a role in price trends of commodities. But, contrary to popular wisdom, that role is often second to that of investor psychology, which unfolds as Elliott wave patterns on charts. Not every wave forecast works out, of course, but as you just saw, the waves can put you ahead of the trend long before the "effect" of surpluses or shortages is calculated.
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