Coffee and OJ make offers traders can’t refuse… but are traders getting what they paid for?
—October 12, 1975, New York Times“It’s all quite mad–it could only happen in America. Only an American would think of investing that much in something as crazy as this.”
The above quote was spoken by a British newsman, reporting live at the unveiling of one of the most outlandish monuments of American engineering: The London Bridge. But not THE London Bridge you’re picturing in your head right now. The short story:
Eccentric oil tycoon Robert McCulloch got wind the UK’s London Bridge (the one, he thought, was “falling down” in the old nursery rhyme) was up for sale. McCulloch had just foot the bill to dredge a massive man-made reservoir in the Arizona desert, so he figured, all I need now is a bridge. 3 years, $10 million ($75 million in today’s money), and 10,000 miles across the Atlantic and Panama Canal later, the bridge was deconstructed part by part and reassembled over Arizona’s Lake Havasu on Oct. 10, 1971, where the British newsman was on site to cover the event.
The “quite mad” part of it all stemmed from the exorbitant cost to move the bridge. But also, the rumor that McCulloch thought he was buying the famous London “Tower” Bridge, the majestic and ornate Victorian gothic marvel that stood just .5 miles downstream the river Thames — NOT the gray, granite monolith he ended up with. This egregious case of mistaken identity (hoax or not) has, henceforth, been known as “McCulloch’s Folly.”
The experience of thinking you’re getting one thing only to end up with something entirely different is one traders and investors are well versed in; and that’s without having 8-figure slush funds for buying bridges.
In turn, the million-dollar question is: How do you know if your interpretation of a market’s trend is correct?
“Fundamental” analysis, which is the mainstream investors’ choice of market forecasting, is also the least helpful in answering this question. It says news events pertaining to a specific market drive price. Negative data causes selloffs, while positive data triggers rallies. Often, though, markets move against this grain. In which case, the experts cop to using words like “thwarted” “defied expectations” or “anomaly” to explain the “crazy” behavior.
Elliott wave analysis, on the other hand, offers an objective (i.e., “the news is irrelevant”), pattern-based measure of market trends. And for every Elliott wave interpretation of price action, there are clearly defined price levels that dictate whether the proposed wave count is correct. You know — before you put a single toe in a pip, cent, tick or coin — where your analysis is a bridge too far.
Consider this unique risk-management feature in the recent performance of two commodities: coffee and orange juice.
On July 27, our Commodity Pro Service identified a still-developing fourth wave correction on coffee’s price chart. Our “upside target window” for wave 4’s end was “above 165.45 into the 169 neighborhood” to be followed by “the resumption of the downtrend in a fifth wave decline.”
On August 1, coffee peaked at 167.50. That day, Commodity Pro Service presented multiple wave counts with this bearish view:
“Structurally the rise looks correct. Its amplitude is enough that it could correct the entirety of the prior decline [in wave 3]. One could say there’s a reversal sequence in place. If one decided to be bearish, we know where this count is wrong; 167.40 is the line in the sand.
“That has been our approach all along. Identify the trend, get aboard the trend, ride the trend until there is evidence the trend has come to an end.”
And this next chart captures coffee’s reversal to 7-month lows on August 18.
For orange juice on July 5, Commodity Pro Service identified a textbook consolidation pattern underway, a triangle. Known for their bipolar behavior – a lengthy sideway move followed by a sharp thrust in the opposite direction – OJ’s future while being tangled in a triangle was quite exciting:
“For the good part of April, May and June, we have seen a lengthy corrective pattern in terms of duration. The rally from 250 looks impulsive, so we’re bullish here against 250. That will satisfy minimum expectations
“We’re looking for more than just a marginally new high. We’re not going to give short shrift to upside potential here. The immediate trend is to the upside. Especially if 266 is exceeded and I believe it will be.”
And this next chart captures OJ’s powerful surge to lifetime highs that has followed.
The joke of “McCulloch’s Folly” is on us: The oil tycoon ended up making (another) fortune off his rehomed “London Bridge”; the tourists who flocked to the Arizona badlands to see it were none the wiser if it happened to be the wrong London bridge.
But for traders and investors, mistaking the identify of price trends can be costly. And while Elliott wave analysis is fallible (no forecasting model is right all the time) it does provide clear price levels to minimize risk and enable traders and investors to cross the bridge of opportunity safely.
From Coffee to Orange Juice: Once Upon an Opportunity
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