by Nico Isaac
Updated: September 13, 2017
Over the last week, the news surrounding orange juice futures has read like an eerie sequel to the 1983 movie "Trading Places." In the movie, the notorious Duke brothers steal an advanced copy of a report showing Florida's orange crop decimated by a freeze. With the damage to the crop extensive, the brothers buy orange juice contracts non-stop for the two days leading up to the report's public release, believing the frost will beget a bullish price surge. From the movie,
"My God! The Dukes are going to corner the entire frozen orange juice market."
Flash ahead to current day, specifically those leading up to and in the wake of Hurricane Irma, and the same, "Duke brother" way of thinking was alive and well in the orange juice market. There, instead of an illicitly obtained freeze report, OJ investors had a very public record of Hurricane Irma's path of destruction.
Basically, the strongest hurricane in the Atlantic basin on record was headed straight for Florida, the world's second largest orange juice provider. Like the freeze in the movie, Irma was expected to wipe out Florida's orange crop, thus setting prices on a bullish course. The following news items set the scene:
Simple cause and effect, right?
Not exactly. See, as far as the supposed "Irma rally" goes, the one where OJ prices soared 13% in the Sep. 4-9 week in which Irma drew near the Florida peninsula -- well, that uptrend didn't begin with Irma.
The following chart (source: Barchart.com) shows that OJ prices began to rally on August 30 -- long before Irma was even a cluster of clouds over Africa.
This illustrates a serious glitch in the news-moves-markets methodology. See, unlike the movie "Trading Places," there's more to commodity market movements than the weather -- or any other "fundamental" incident affecting supply (or demand).
In our opinion, while fundamentals can play a supporting role in commodities, the actual star of the show is investor psychology, which unfolds as Elliott wave patterns directly on price charts.
Let's go back and retrace the steps of OJ's recent rally from the perspective of Elliott wave analysis, specifically to the August 25 Daily Commodity Junctures. There, our senior commodities analyst Jeffrey Kennedy identified a bullish Elliott wave set-up on OJ's price chart, reprinted below: (Editor's note: the larger wave count has been removed for this publication)
Five days later, on August 30, OJ prices embraced the upside. And a few days after that, Irma emerged as a Category 5 hurricane.
Turns out, this isn't the first time that Elliott wave analysis saw a significant price turn in OJ coming. In fact, this time last year, in our September 2016 Monthly Commodity Junctures,Jeffrey Kennedy identified a major bearish set-up on O.J.'s price chart and prepared his subscribers for a significant drop:
"Now I know I don't talk frequently about the OJ market but the wave patterns in this market I find very interesting. Simply put, if we're correct in our Elliott wave analysis, then that argues that the market is very vulnerable to a decline.
"I think as we move forward, most likely into October and November, the odds are very, very high... we will see a tradable top form."
Two months later, OJ prices formed a top and turned down in a precipitous, 40%-plus sell-off to one-year lows. The next chart captures the market's bearish descent:
On the big screen, i.e. the movies, news events are the key to unlocking market price moves.
But on the actual computer screen of real-world markets, the one investors follow at home or at work, we believe the way to anticipate high-confidence trend changes is with Elliott wave analysis. And, right now, in the current Monthly Commodity Junctures, Jeffrey Kennedy' has identified potential, long-term turning points in wheat, cotton, and lean hogs!