How to Survive Commodity Boom One Price Shock at a Time

Example: Lean hogs' rally to 6-year highs was entirely foreseeable -- if you paid attention to Elliott wave price patterns.

by Nico Isaac
Updated: July 07, 2021

The 1980s were a heyday of frenzied market speculation, especially among commodities. One of the crazier moves that took hold on the Chicago Exchange was called the "O'Hare Play." It went like this: Traders placed whale-like positions on specific markets, drove directly to the O'Hare airport, and then checked their status. If the position was a success, they'd buy a plane ticket for a lavish vacation.

If it failed, they'd buy a one-way ticket to a random destination to start their life entirely over.

Four decades later, in the year 2021, echoes of this high-adrenaline time can be heard once again as commodities across the board experience mania-like rallies. Writes a May 1 Bloomberg:

"The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life.

"From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years."

Added a July 1 Reuters: "Commodity Traders Make Billions, While Prices Rise for Everyone Else."

But before you pack your bags and head to the airport to find out whether you'll be spending the next week in Cabo sipping tiny umbrella cocktails on the beach -- OR, leaving your life as you know it behind, consider this third option:

Learn to navigate even the most volatile commodity markets by recognizing high-confident set-ups on price charts and manage risk within active positions.

Here's how it works, using the real-world performance of lean hogs. In early 2020 -- before the pandemic's first wave hit -- hog prices were already clinging to multi-year lows after plummeting 60%-plus from their 2019 peak.

And, according to the mainstream experts, the plight of the Covid pandemic was set to slaughter the livestock sector and any hope of a comeback. Explained one April 2 Reuters:

"U.S. hog futures dropped to a 3-1/2-year low on Thursday... as recession concerns and surging U.S. unemployment due to the coronavirus pandemic triggered broad liquidation across the battered livestock markets.

"The bulk of our bacon goes to restaurants and that's why bellies are as cheap as they've been in 20-odd years."

The outlook appeared dire. Hog prices were slated for the bearish butcher block. And yet, the exact opposite scenario occurred. As this chart of hog futures shows, prices instead rocketed 60% to a 7-year high in early June 2021 before letting out some air.

On one hand, it's easy to chalk hogs' run up to the widespread commodities boom that's propelling everything from lumber to rubber to new heights.

But that perspective doesn't explain what caused hogs to rise -- in the middle of the pandemic's first wave! -- nor did it anticipate the move, in the first place.

In turn, the question becomes: Was there a way to foresee the market's comeback when prices were still struggling at multi-year lows -- long before 2021 became the year of the great "commodity Supercycle" (May 7, 2021 Hedgeweek)?

Yes! In our July 2020 Monthly Commodity Junctures, editor Jeffrey Kennedy added lean hogs to his "Featured Market" segment. His analysis determined that investor psychology, which unfolds as Elliott wave patterns, had reached an important bearish nadir.

Jeffrey's chart, pictured below, showed hogs at the end of their 2019 selloff and start of a new uptrend that would see a doubling in price.

From there, hog prices took off to the upside in their strongest winning streak since 2014. Then, in the March 2021 Monthly Commodity Junctures, Jeffrey presented this chart of the market which called for further rally into the 120 area, followed by a corrective reversal.

By June, hogs had reached the 120 area and Jeffrey Kennedy shifted his focus to the market's near-term potential. In the June 11 Daily Commodity Junctures, he showed this chart of hogs and said the anticipated reversal was underway.

Once again, hogs followed their Elliott wave script and turned down for the remainder of June.

The commodity boom of 2021 is heating up, and with it follow the familiar echoes of high-risk "O'Hare" like plays.

Consider instead knowing where the world's leading commodity markets are headed in the days, weeks and months ahead with our crowd-pleasing Commodity Junctures Service.