2011 will go down in the books as the year of cocoa's discontent. Since soaring to a three-decade high in March, cocoa prices have plummeted 45% to log their steepest losing streak in FIFTY years.
Today, we're rewinding the clock to see how Elliott wave analysis enabled EWI's chief commodity analyst and Futures Junctures Service
editor Jeffrey Kennedy stay one step ahead of cocoa's historic bear market.
The time is March 2011. Cocoa prices have soared to the out-of-orbit regions of a 32-year high. And, according to the mainstream experts, ongoing political tensions in the world's leading cocoa producer, Ivory Coast, sealed the market's bullish fate. Their magic "bull"et being the refusal of incumbent President Gbagbo to cede power after losing the November 28, 2010 parliamentary elections to newly recognized leader Outtara. In the words of one news source at the time,
"As long as the stalemate continues, cocoa prices will trend higher" (Financial Times)
YET, cocoa's prices stopped trending higher in early March 2011. The violent standoff between Ivory Coast's rivals, however, continued well into early May 2011, when Gbagbo's forces were finally defeated. Here below, the following chart of cocoa prices since January 2011 put the timeline into perspective:
But while cocoa prices failed to follow their "fundamental" script in early 2011, they did fit their Elliott wave model to a T.
First, in EWI's January 2011 Monthly Futures Junctures
, editor Jeffrey Kennedy revealed how a huge, multi-year long ending diagonal triangle Elliott wave pattern in cocoa's price charts painted a strong "topping" picture. There, he presented the following chart and analysis:
"Cocoa has been tracing out an ending diagonal. The ending diagonal indicates exhaustion of the larger movement. This is why it may form only in the fifth wave position of impulsive waves and the wave C position of A-B-C formations.
"When this pattern finishes, it introduces a sharp volatile move back to below the origin of the pattern... Prices are advancing in three waves in wave 5 (circled) to new highs beyond the December 2009 peak of 3510. The final three wave move to new highs will set the stage for a sizable and lengthy bear market in cocoa in 2011."
Two months later, cocoa prices had indeed rallied above the December 2009 peak of 3510, to the new high at 3775. From there, cocoa turned down as Jeffrey's forecast had anticipated.
"The result of this rally on the weekly continuation chart was a throw-over, something that commonly occurs in diagonals. In this case, the throw-over shows up as a brief break of the trendline that connects the extremes of waves 1 and 3 (circled). Now that requirements of the completed diagonal have been met, the stage is set for the next [bearish] act."
45% down to a three-year low later -- and the question now is, is cocoa's bear market finally over?