The Crazy Volatility in Cocoa Has Us Giving Thanks for Elliott Wave Analysis

From one-month lows to six-month highs, cocoa's Elliott wave path then... and now

Here's a fun fact to share around the dinner table this Thanksgiving: The large fowl we call turkeys were given that name by the British, who presumed the bird came from the country, Turkey. In truth, turkeys are native to North America. Somehow saying, "Please pass me a slice of North America" doesn't have the same ring to it.

This story recalls another fallacy -- or fowl-acy! -- that likewise persists in the face of facts to the contrary; namely, the mainstream financial notion known as "fundamental market analysis." The widely held belief goes like this:

Financial market prices are driven by external events, or "fundamentals," which can include crop-destroying weather patterns, political unrest, earnings reports, crop data, supply and demand numbers and so on.

This theory is as old as the name "turkey," and as commonly accepted!

Yet, we have a birds-eye view into a very different way of interpreting market behavior, straight from Elliott Wave Principle -- Key to Market Behavior (EWP, for short):

"Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.

"The path of prices is not a product of news."

What "law of its own" does the market follow? EWP continues:

"The market's progression unfolds in waves. Waves are patterns of directional movement. Each pattern has identifiable requirements as well as tendencies. The Wave Principle is the only method of analysis that also provides rules and guidelines for forecasting."

To understand how Elliott wave analysis works, let's review the recent history in an often-volatile cocoa market: At the end of October, cocoa prices were crawling sideways along multi-week lows. The market seemed stuck and directionless. Hindering matters was the fact that "fundamental" analysis of cocoa was all over the map.

From the popular online service Bar Chart on October 31, traders were served this rangel of viewpoints:

Bullish: "Cocoa prices also saw support from Monday's report that Nigeria's Sep cocoa exports fell -16% y/y... due to excessive rain. Nigeria is the world's fifth-largest cocoa bean producer."
Bearish: "Conversely, the Cocoa Association of Asia said Asia Q3 cocoa grindings rose +9.5% y/y."

Bullish: "Cocoa prices found support when the International Cocoa Organization (ICCO) on September 1 cut its 2021/22 global cocoa production estimate... and raised its 2021/22 global cocoa deficit estimate... from a June forecast"
Bearish: "In 2020/21, global cocoa production rose to a record... and in 2020/21, the global cocoa market was in a surplus of."

Bullish: "In a bullish factor, Ghana reported... the smallest crop in 12 years, due to drought and swollen shoot virus. Ghana is the world's second-largest cocoa producer."
Bearish: "However, the Ghana Cocoa Board estimates 2022/23 Ghana cocoa production will rebound +31% y/y to 850,000 MT."

In turn, using outside conditions to gauge cocoa's future trend ended in a draw.

By way of Elliott wave analysis, however, cocoa's price chart presented a clear path forward. On November 1, our Commodities Pro Service identified a clear Elliott wave contracting triangle. For newbies, here is a diagram (in bull and bear markets) and definition:

Triangles progress sideways, in five waves, and can try the patience of peak-or-bottom chasing investors and traders. But, with triangles, the wait is worth it. Their build-up occurs in wave 4, B or X of an impulse or correction, thus preceding a final, powerful "thrust" for wave 5 or C to complete the larger pattern. Once a triangle is over, the market embarks on a new trend.

Returning to the November 1 Commodities Pro Service, we showed this chart of a completed, bullish wave B triangle in cocoa. The next move would, therefore, be a wave C thrust higher:

"An advance through yesterday's 2355 high will put the ongoing wave (C) scenario on a solid ground. The next upside obstacle is at 2407. Key support is at 2287, which should hold to keep the near-term bullish outlook intact."

On November 4, the initial 2407 level was met, and Commodities Pro Service offered this direction to "maintain the upside focus toward 2422 and then the 2469 swing high."

Cocoa prices continued their march higher. Then, on November 10 Commodities Pro Service prepped the stage for an imminent turn down in wave 4: "The working assumption remains that an interim top should be at hand before giving way to corrective lower lows (i.e., wave 4)."

From there, cocoa peaked and turned down. On November 16, Commodities Pro Service set the stage for further declines in wave 4:

And, this final chart captures the full extent of the market's post-triangle thrust and retracement:

This is where I remind you of the obvious: trading commodities carries risk. It's not for the faint of heart. That said, Elliott wave analysis provides an objective framework for assessing high-confident "windows of change," and identifying critical price levels to help manage that risk every step of the way.

Take the first step today, with our Commodities Pro Service.