This Commodity Goes from Bust to Bonanza Despite the Most Bearish Backdrop of the 21st Century!

With prices at a decade low and sentiment in the dumps, Elliott wave analysis called for cotton prices to... rally!? And here is what happened…

by Nico Isaac
Updated: August 18, 2021

It may be known as one of the softest commodities, but over the last year, cotton prices have been anything but soft. August 2021 has seen cotton soar to its highest level in nine years as analysts race to upgrade their price forecasts from 80 cents a pound to a $1.

As this August 12 industry report puts it, cotton is enjoying a "price bonanza":

"Cotton prices have rallied since the great commodity crash of April last year...

"This is one of the highest rises within agricultural commodities, outside of maize and edible oil crops."

The article cites a "quicker-than-expected 15% rise in consumption" in cotton throughout the Covid year as the main catalyst for the comeback.

If you think about it, data measures like consumption are helpful up to a point. That point is to confirm an already established trend, i.e., you can only ascertain how much cotton has been used until after it's already been used. In other words, it's a retrofitted "explanation" for what's already behind.

But what if we went back to start of the Covid year? Were mainstream analysts predicting a rise in cotton consumption that would support a coincident price bonanza -- then?

Not by a long shot. In March, April, and May of 2020, during the initial wave of the pandemic, cotton prices circled the drain of a decade low. The ramifications of factory shutdowns, retail closures, cratering export sales, and a cease in trade with China were widely expected to be a major bust for cotton demand.

In turn, the first global pandemic since the 1906 Spanish Flu forged the most bearish backdrop of the 21st Century for cotton. These news items from the time take us back:

• "Cotton is Tanking" (April 14 Pensacola News Journal)?
• "Cotton Growers Were Recovering from Trade War: Then Coronavirus Hit. Hope is disappearing... There's so much uncertainty right now. There's risk all over the potential crops." (March 23 Wall Street Journal)

Surmised one March 12 Agripulse:

"You start shuttering retail stores and that affects the manufacturer, which affects mills and then you start to have billions in contracts being canceled... All of that backs it way up to the farm gate and you see prices down 20% or 30%. It's painting a pretty tough picture [for cotton]."

A tough picture indeed!

And yet, rather than collapsing, cotton prices doubled in value to 9-year highs. Effectively, the year-plus long pandemic didn't weigh on the commodity in the least. How is that possible?

Our view is that fundamentals, even those as catastrophic as the pandemic, do not determine the overall trend of a market. We believe investor psychology is the primary driver of market strength or weakness. The technical aspect of psychology is that it unfolds as Elliott wave patterns directly on price charts.

So, while fundamental analysis painted a "tough" picture for cotton's future, Elliott wave analysis drew a triumphant one. Here, in the May 2020 Monthly Commodity Junctures editor Jeffrey Kennedy showed this cotton chart, below (full Elliott wave count reserved for subscribers), which identified the multi-year sell-off from the 2011 peak as a wave c decline of a larger "triangle" wave pattern. The downtrend was at or near its end, and the next significant move would be to the upside.

In Jeffery's words:

"I think the downside is limited; we're probably 90-95% complete so I'm not looking for significantly lower levels.

"At that point, I think we're going to be looking at potentially a very nice opportunity to the upside as we see cotton prices begin to double over the next few months if not years."

In the July 2, 2020 Daily Commodity Junctures, Jeffrey revisited cotton's chart to alert his subscribers of a major development: The bottom was now in place. Jeffrey wrote:

"This week's break of critical resistance at 61.14 in cotton turns the trend up to 63.80, potentially 65.35. Key and critical support levels that keep short-term bullish wave patterns intact are 60.90 and 59.32, respectively."

From there, cotton prices indeed began to rally. In the ensuing year, the market nearly doubled as Jeffrey had forecast 13 months earlier.

At the end of the day, this is a story about trust -- namely, trust in factors other than "fundamentals," that there is a way to identify high-confidence setups in commodity markets before they become well-established trends.

That way is our Commodity Junctures Service.