by Nico Isaac
Updated: April 03, 2018
Who among us has not looked at a famous painting by, say, Jackson Pollock or Pablo Picasso and thought, "What the heck do all these squiggly lines and color splatter mean?"
It just seems so random and chaotic without... well, context. American artist Kenneth Noland said it best:
"For me, context is the key -- from that comes the understanding of everything."
That philosophy equally applies to the world of financial markets. Without context, price charts are but abstract pictures of random lines, providing no way for investors and traders to decipher the trend.
For many investors, though, the need for "context" is seemingly satisfied with "market fundamentals": events unfolding in the backdrop; economic reports, supply/demand data, weather disruptions, and more -- all things that, many believe, drive price trends. The idea looks a lot like this:
Let's look at a real-world example. On March 23, lean hog prices plummeted to a four-month low. The slump coincided with the U.S. versus China tete-de-tete over tariffs, the nightmare "trade-war" scenario.
To recap: The Trump administration had been threatening tariffs for months -- a move that was projected to impact various industries. For lean hogs, things hit uncomfortably close to home on March 22-23, when stiff tariffs on Chinese goods were announced. China threatened to retaliate with tariffs on U.S imports like wine and, you guessed it, pork.
The chart below captures the popular trade war = hog fall narrative:
It's a fundamental picture we can all understand. The "context" is clear. It makes sense. Except, that is, when you take a closer look.
See, China's threat of "retariffiation" began on March 22. But, as the chart below makes plain, lean hog prices started falling long before that.
So much for the "fundamental" context.
Please allow us to suggest an alternative: the "Elliott wave context." Here we turn to one of our most popular educational videos, the "Four Keys to Crafting Rock-Solid Trades," recorded by our own Jeffrey Kennedy.
(Editor's Note: Right now, you can get Jeffrey Kennedy's Four Keys to Crafting Rock-Solid Trades for free! Follow the link to begin)
In this 20-minute-plus video, Jeffrey explains the origin of Elliott-wave based pattern analysis and says:
"The brilliant thing about Elliott wave analysis, or what R.N. Elliott did back in the 1930s, is that he recognized that price action trends and reverses in recognizable patterns. He identified five basic patterns and gave rules and guidelines for each."
Instead of waiting for news and events to explain what prices have already done, Elliotticians look directly at a market's chart to identify patterns that indicate what prices will do next. In Jeffrey's own words,
"Elliott wave analysis does what other methods don't. It provides a context for price action."
Remember the popular fundamental context for the lean hog sell-off -- that prices fell because of China? Well, in his February 7 Daily Commodity Junctures -- yes, six weeks before China's March 22 pork tariff proposal -- Jeffrey Kennedy used Elliott waves as the context for this, very bearish, lean hogs forecast:
"The sell-off that we've seen recently in this market is indicative of wave three selling, or more specifically, wave three of three. ...wave 3 is the wave that typically travels the farthest in the shortest amount of time, even more so when you're in wave 3 of 3.
"Moving forward, my focus in lean hogs is now to the downside. ...we need to focus our attention to the downside for a more serious rout in this market."
This next chart captures the full extent of the sell-off that followed:
And this chart shows you that it was the February 7 Daily Commodity Junctures' Elliott wave analysis-- and not "market fundamentals" -- that were first in line to the hog price slaughter:
Investing and market speculation do not need something that explains why the market did what it did in retrospect. You need context that prepares you for future price turns.Every day, Jeffrey Kennedy's Commodity Junctures does just that. It scours price charts of the world's most-traded commodities looking for the right Elliott wave context, the most promising setup. You get Jeffrey's short-term picks in Daily Commodity Junctures, while its sister publication Monthly Commodity Junctures gives you the long-term view of the markets whose price charts scream "opportunity!"