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Predicting Commodity Markets One Elliott Wave Pattern at a Time

In 2012, our analysis outlined a bearish trend for wheat prices, right before the grain entered a world of pain

by Nico Isaac
Updated: October 16, 2017

The great American philosopher Yogi Berra may have been talking about baseball when he quipped, "I never make predictions, especially about the future." But for many commodity investors and traders, the sentiment seems equally fitting.

How, pray tell, do you predict a market's long-term trend when there are so many unknowns? What if a natural disaster wipes out a huge chunk of global supply, or a devastating crop disease occurs; what about a worker strike, a drought, a flood, or the debut of some cheaper, demand-curbing alternative?

The answer to that question is, you don't. No one does.

But in our opinion, you don't have to. As Elliotticians, we believe news events play a supporting, price-driving role, at best. The real star, however, is investor psychology, which unfolds as Elliott wave patterns directly on price charts.

Let's take, for example, wheat's four year-long bear market, which began in 2012. At the time, wheat prices were soaring to their highest level in four years amidst what many believed to be the start of a devastating global food crisis.

It certainly looked that way from the outside. Grain prices were on a tear, and every external dot in wheat's fundamental backdrop connected to form a straight, bold line pointing UP. At the top of the list:

  • Wheat reserves stood at a multi-year low
  • Demand was on the rise
  • Both the U.S. wheat belt and Russia's Black Sea growing region were suffering their worst droughts in decades. (In the U.S., it was the most severe drought since 1956.)

Wrote one news source at the time:

"Given the long season ahead, and the risk of weather disruptions along with low inventories, the outlook remains bullish. The upside risk is considerable." (March 30, 2012 Bloomberg)

Added another:

"Price of bread set to soar amid food crisis fears as U.S. suffers worst drought for half a century." (September 10, 2012 This Is Money)

And yet, in our December 2012 Monthly Commodity Junctures, our senior commodities analyst Jeffrey Kennedy adopted a completely different stance regarding wheat's long-term future; namely, a bearish one.

The reason being: Jeffrey looked beyond wheat's fundamentals and onto the market's price chart -- where a bearish Elliott wave pattern had formed. In the December 2012 Monthly Commodity Junctures, Jeffrey warned wheat prices were about to be "cut in half."

"Wave patterns in wheat call for a months' long decline below $4 a bushel -- admittedly an ambitious forecast.

"As we move into 2013, it will be significant if the 600-550 area acts as resistance rather than support. One of the best ways to confirm a trend change in a market is to look for transitions -- places where support becomes resistance or resistance begins acting as support."

Chart 1

From this forecast, wheat prices plummeted 50%-plus in a four-year long bear market. When all was said and done, wheat's freefall ended in September 2016 at a decade-low at $3.86 a bushel, "below $4 a bushel" target Elliott wave analysis had helped to identify four years prior.

The catastrophic global food crisis that was supposed to accompany wheat's ongoing rally also failed to transpire. In 2015 -- food commodity prices plunged to a six-year low.

Wheat prices today:

Chart 2

Elliott waves won't warn you of every twist and turn in the market; no method is perfect. But as you've seen from many examples we've shared on these pages, all too often just when the mainstream is looking one way -- and Elliott waves are pointing in the opposite direction -- it's the waves that end up being right.

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