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(Video) Commodities: A Checklist for an Exhausted Trend
The sentiment picture in commodities has reached a new extreme, even as prices remain below their 2011 high

By Nico Isaac
Mon, 24 Mar 2014 10:45:00 ET
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Editor's Note: You can find the text version of the story below the video. Enjoy!

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Every experienced Elliottician has a daily checklist for what constitutes a financial trend that is nearing exhaustion. This includes: milk, eggs, dry cleaning -- oh wait sorry, wrong list! Here's the real one:

  • A sentiment extreme among investors
  •  A one-sided view among the media
  • A sustained move in prices
  • Confirming technicals
  • And most importantly, a confirming Elliott wave pattern 
As we went down this checklist in early 2011, every item was marked off one by one with regard to commodities.
 
A sentiment extreme -- In April 2011, the Daily Sentiment Index of trader optimism had reached a dizzying 93% bulls (trade-futures.com)
 
A one-side view among the media -- these headlines from the time capture the lopsided loptimism for hard assets:
  • "The bull market in commodities is likely to continue for some time." -- Dec. 8, 2010 Wall Street Journal
  •  "The crash of 2008 in commodities was a mere blip... The rally in prices shows no signs of slowing." -- March 9, 2010 National Post
  • "All of the elements that contributed to the long bull run in commodities from October 2001 to August 2008 are in place." -- January 6, 2011 The Telegraph
 A sustained move in prices: From its 2009 nadir, the bellwether Thomson Reuters/Jefferies CRB Index rallied to its highest level in two years, while commodity exchange traded funds experienced their highest ever inflow on record at the end of 2010.
 
And, most importantly, a confirming technical and Elliott wave picture. In his January 2011 Elliott Wave Theorist, Bob Prechter the final pieces of the puzzle for an end to the commodity uptrend was in place:
 
The current juncture in ... commodities markets is the flip side of early March 2009. Then there was a completed Elliott wave structure (five waves down), extreme bearishness among all types of investors, a subtly diminishing downside momentum, and scary fundamentals. Now we have a completed counter-trend Elliott wave structure (three waves up), extreme bullishness among all types of investors, blatantly diminishing upside momentum, and (according to the majority of economists) bullish fundamentals. Stocks and commodities were oversold and washed out in early 2009. Now they are overbought and adored after only a partial retracement of their 2008 declines... Aside from commodity blow-offs, markets generally fall way faster than they rise. This year should begin a multi-year period of outsized gains for those on the short side.

In the months that followed, the "worst raw materials slump since 2008" sent everyone from individual investors to behemoth investment banks to the commodity exits. From its April 2011 high, the CRB Index turned down in 20%-plus, three-year long bear market.
 
There was every supportive piece of evidence to make our bearish case in 2011.
 
Today, the checklist is no less instrumental for determining whether the 2014 uptrend in the CRB Index, and commodities sector as a whole, is nearing exhaustion. Right now, our multipurpose Commodity Junctures examines every critical aspect of the raw materials marketplace -- from sentiment measures to the near- and long-term Elliott wave structure. Don't let the next big opportunities pass you by.
 

 

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