Wheat: How to Forecast Commodities Without Looking at Supply/Demand

Hello, everybody. My name is Jim Martens. I’m the editor of Elliott Wave International’s Commodities Pro Service, Commodity Junctures and a member of the new Trader’s Classroom lineup.

I’ve been a user of the Wave Principle now for more than 40 years. I’ve stuck with the one method due to its ability to first, identify the dominant trend; second, to identify levels that in the case of a bear trend should not be exceeded if the trend is still intact; and third, it helps identify potential opportunities.

The first two traits were critical on December 26 this year. But before we get to that, let me build a bit of a backdrop.

We’ve been following wheat from a bearish outlook for more than a year now. Rebounds have proven corrective,
even the rebound to 809.50 bases the March contract. It was a sizable advance, but it unfolded in three waves, which means despite the amplitude of the move, it would prove corrective. And it’s done so. The entire rise has been fully retraced.

From 571.75, you can see a similar three-wave movement. Though in this case, the dip to a new low along the way to 649.50 signaled to us that this is an expanded flat correction, still in three waves, unfolding 3-3-5. Finishing that correction told us that 649.50 was now an important level if the downtrend was intact.

From there, we can see on the hourly chart that wheat fell in a trend-defining five waves to 602.50, and then it recovered in a corrective manner to 632, just two ticks (or half a cent) above where the recovery retraced 61.8% of the decline from 649.50. And we thought that we might have put in a secondary high there, but the key level remained 649.50.

Wheat fell for a bit, but on the day after Christmas, Dec. 26, you can see the surge through 632. That breach of the former short-term high might have caused some to conclude that wheat was changing course, was turning to the upside and was preparing to stage a much more substantial recovery. That wasn’t the case.

At Elliott Wave International, minutes after the breach, we posted an intraday update as follows:

“The surge through 632 is not necessarily a bullish event. The expanded flat to 649.50 visible on the daily chart suggests that wheat will resume its decline from no higher than the end of the correction. Ideally, wheat will resume its decline from closer to current levels than the 649.50 lying in the sand. Wheat fell in five waves from there, and the corrective rise from 602.50 forms a reversal sequence. The daily chart correction coupled with the bearish reversal sequence from 649.50 suggests wheat will reverse course.”

You can see how we used the information that the Wave Principle provided us regarding the dominant trend (visible on the daily chart) with the short-term price swings from 649 (visible on the hourly chart). And together those suggested we shouldn’t panic on that breach of 639, that it might be a trap, and that the market would likely reverse course from below 649.50.

Now, the jury is still out. If we’re correct, the jury is still out regarding whether wheat will hold 649.50 and turn lower. But you can see how the Wave Principle allowed us to identify the trend, identify our line in the sand (the level that should not be exceeded if that trend is intact), and therefore allowed us to act without emotion on that breach of 632.

The latter is critical to long-term success in the markets, and it’s just one of the features that the Wave Principle brings to the table.