How to Predict Commodity Trends? Put One (Elliott Wave) Foot in Front of the Other
In early 2020, all “fundamental” signs pointed into the abyss for commodities. The next two years would take a very different turn – here’s why
by Nico Isaac
Updated: January 26, 2023
This holiday, my husband's stepmother gifted him a beautiful pair of hand-knit, house moccasins to replace what we had all come to jokingly call his pet slippers; a pair so worn and tattered, barely held together by a few frayed strings, bottoms flapping as he walked, resembling an old, bedraggled sewer rat that had managed to drag itself out of a drainpipe.
I was understandably shocked to see days later, him wearing the brand-new slippers...
INSIDE the old pair.
(Photo evidence secretly provided below)
We as humans tend to resist change. We can get too comfortable with old ways of being, thinking, or -- warming our feet. And when some new idea comes along that is undeniably stronger, more effective, and intact, we can find it challenging to adopt.
Take, for example, fundamental" market analysis. The father of fundamental" analysis, Benjamin Graham, popularized the idea of value investing in the late 1920s, asserting that stock market trends likely reflect all the external information about that market, i.e., supply reports, earnings data, crop conditions, trade wars, and so on.
Commodities, in turn, would be especially vulnerable to these factors, as they are literally exposed to the external winds of mother nature.
It's been nearly a century since mainstream experts have worn fundamental" analysis as their primary model for predicting market trends. And there's little sign of them changing into a newer model, as the recent history of commodities makes plain.
We begin in early 2020, the start of the Covid-19 pandemic. At that time, mainstream financial experts saw supply bottlenecks, factory shutdowns, and cratering demand causing a widespread collapse in commodity prices. The crash in oil into negative territory that April seemed to be the first shot in a 13-gun Grizzly salute. On April 23, 2020, the World Bank issued a dire Commodity Markets Outlook" that stated:
A Shock Like No Other: Coronavirus Rattles Commodity Markets
The global economic shock of the COVID-19 pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020."
And, on April 27, the Economist added insult to injury:
Oil and Commodity Prices Are Where They Were 160 Years Ago...Don't bother looking for a long-term trend; forecasting commodity prices is a mug's game."
Now look closely at this fundamental" construct. You'll see it's worn, ragged, and fatally frayed to the seams. Because in April 2020, the bellwether Bloomberg Commodity Index did exactly the opposite, touching bottom and embarking on a 2-year long ascent to record highs.
It's time to slip into the newer, Elliott wave forecasting model. It concedes that value blocks of information about markets can cause temporary changes. But not even a white swan event like the pandemic drives the larger trend. Only investor psychology, which unfolds as Elliott wave patterns directly on -- not outside of -- price charts, can.
Here, we dig into the archives and pull out our March 2020 Global Market Perspective. There, our analysts identified an alternate, bullish set-up underway in the Bloomberg Commodity Index. This scenario called for prices to fall further in 2020, [to] our ideal target range of 60-64." We added:
If [the index] were to rally back to their January 2020 highs, we would consider bullish scenarios for the entire EM/commodities complex."
In March, the Index touched down just below 60 and began to rally, tipping its hand in favor of the bullish trend change.
In the September 2020 Global Market Perspective, we presented an updated chart of the Bloomberg Commodity Index and confirmed the broad directional shift was underway:
Now that the Bloomberg commodity index has completed a three-wave decline from 2008 and then advanced impulsively from its 2020 low, we can say that commodities overall have also ended their secular bear market from 2008."
And this is what followed: the Bloomberg Commodity Index soared 138% into June 2022 before reversing lower:
In plain English, Wall Street never saw the commodity bull market coming because their fundamental" analysis projected the pandemic-driven drop in demand indefinitely into the future.
And once again, after prices began to ease and reverse across the board, few were convinced the raw material boom was over. On May 9, 2022, the South China Morning Post wrote: JPMorgan bank says bull run in commodities has legs as inflation, China lockdowns whipsaw stock investors."
Wrote another industry report on June 23: The Commodities Bull Market is Just Getting Started."
Conversely, the May 2022 Global Market Perspective investigated the Elliott wave pattern underway on the Bloomberg Commodity Index to assess the sector's future. Just as the pattern showed a trend-defining five-wave move down in March 2020, now the pattern showed five waves up and done, another good moment for the trend to stop and reverse. The rally's end was nigh:
At this point, the initial impulse wave up is mature, and the likelihood of a deep countertrend retracement is high."
Rather than picking up steam, the commodities bull trend stalled. By January 5, 2023, the Bloomberg Commodity Index shed its entire 2022 gains before taking a breath.
We know how comfortable old ways of seeing things can be. But when it comes to understanding the true motivations for market behavior, those frayed models have worn thin.
Right now, the January 2023 Global Market Perspective weaves invaluable insights into the future of commodities throughout its 52-page report, including a section on a broadscale stillness" in financial activity, including a drop in VIX CBOE Oil Volatility Index and why this trend is the perfect setup for an across-the-board" sea change.
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