Related Topics
Commodities , Stocks , Trading

What Fueled Cocoa's Recent Surge? A Lack of Beans OR Bullish "Triangle"? You Decide

Could you have anticipated cocoa's recent rally to 1-year highs? You betcha!

by Nico Isaac
Updated: March 03, 2023

The fascinating history of cocoa dates back thousands of years. This was a few centuries before I called my parents to a family meeting at age 8 to argue in defense that eating chocolate instead of the apple placed in my lunchbox everyday was perfectly acceptable because, as I had just learned, cocoa beans grew inside fruit pods on a tree.

Somehow, despite my airtight logic, I didn't win the case.

A more destructive misunderstanding surrounding cocoa occurred in the 16th century. Then, Spanish conquistador Hernan Cortez invaded the Aztec kingdom of Montezuma, believing it to be filled from floor to ceiling in treasures of gold and silver. But instead, Cortez and his army raided the palace only to find huge quantities of cocoa beans.

To the Aztecs, hot chocolate was far more prized than precious metals. Had this difference in valuation been known to Cortez in advance, it could very well have altered the course of history and spared the destruction of the Aztec empire.

To make a more direct parallel to the financial markets, going in blindly to a stock, bond, or commodity market, only to discover the "truth" (or what is perceived to be the truth) for a major price move after the fact is quite common among mainstream financial analysis.

Take, for example, cocoa. On February 15, cocoa futures soared to their highest level in 1 year, traded sideways, and then rallied even higher into March 1. And, according to mainstream analysts, the catalyst for the uptrend came when news of a substantial supply deficit went viral. From Barchart on Feb. 15:

"Cocoa prices Wednesday rallied sharply, with NY cocoa climbing to a 1-year nearest-futures high... on reports that some Ivory Coast cocoa exporters are close to defaulting on their contracts due to a lack of cocoa beans, with some shortage estimates as high as 150,000 tons.

"With more cocoa grinding being done locally in the Ivory Coast, there are not enough coffee beans available to export to satisfy exporters' contracts."

But this is a mistiming of events. Cocoa's uptrend began before the supply deficit bombshell. The news event didn't trigger the rally. Investor psychology, which unfolds as Elliott wave patterns directly on price charts, did. That internal signal of a bullish trend change occurred on February 8, as noted by our Commodity Pro Service that very day.

There, Commodities Pro Service editor Jim Martens identified a trademark pattern underway on cocoa's price chart: a contracting triangle. For newbies, a triangle (pictured here in bull and bear trends) is usually a sideways pattern that occurs in the position prior to the end of a wave sequence -- most commonly in wave 4 of a 5-wave impulse. Once a triangle is complete, you can count on price to thrust to a new extreme, up or down, in wave 5.

Bull Market - Bear Market

On February 8, Commodities Pro Service showed this chart of cocoa with the contracting triangle front and center. The implication was clear: Once complete, prices would experience a powerful move higher. From Jim Martens' analysis:

"You can see on the daily chart sideways trade in five waves in both directions. All the movements seem to be in 3 waves and that's what we're looking for. So, the next movement in May cocoa will be to the upside, and we'll be looking for new highs above 2700."

Cocoa May 2023 240-minute range

This next chart brings price action since then into focus. Cocoa's triangle finished and was followed by a rally to 1-year highs on March 1.

Cocoa May 2023 60-minute range

I'm not a betting person, but I'd bet my entire stash of dark chocolate truffles that mainstream market analysis will always be able to find that "perfect" reason for a big move in name your market -- after the fact.

But if you want a method of market analysis that helps you arrive at major trend changes in advance -- not always, of course, because no forecasting method works all the time -- then our Commodities Pro Service may be the right choice.

X Marks the Spot of Elliott Wave Opportunities

Markets don't conform to platitudes. They conform to Elliott wave patterns.

Our brand-new Commodities Pro Service is where education meets action. Whatever your time frame, Commodities Pro Service presents intraday, daily and weekly analysis of the world's leading grains, livestock, and softs markets -- including monthly Q&A's with editor Jim Martens.

Act now to improve how you see markets forever.

Euro Stoxx 50: Sentiment Hits “Bellringing” Extreme

This European sentiment measure was at an extreme for the better part of five years. Now, it appears the tide is turning. Be prepared! Optimistic or pessimistic extremes are usually followed by an extreme in the opposite direction.

EUR/USD: From 2-Year Highs to 2-Month Lows. Press “Pause” on the “Fed Pause.”

On May 3, the world's most heavily traded currency pair, the euro/U.S. dollar soared to its highest level in 2 years. Mainstream experts focused on the Fed. Expectations of a "pause" in rate hikes would keep the wind at the euro's back. But that's not what happened. And here's why.

See What Happens When the Fed's Rate Hikes Stop

See our seven-decade chart that shows what happens when the Federal Reserve ends the cycle of interest rate hikes.