Cocoa Soars to 6 ½ year Highs: Is the Rally Running on Empty?
And could you have anticipated its rally from the start? The second answer is YES! The first one is just ahead.
by Nico Isaac
Updated: May 22, 2023
I recently learned the incredible story of Bobbi Gibb. At 23 years young, Gibb's application to run the 1966 Boston Marathon was denied on account of the (then prevailing bias) that "women are not physiologically able to run a marathon."
Instead of accepting rejection, Gibb donned a tight bathing suit, her brother's Bermuda shorts, a baggy hooded sweatshirt and hid in the bushes at the race's starting line. After a large group of runners let out, Gibb snuck her way onto the course to join the throng.
Halfway into the race, however, Gibb became overheated by the extra layers of clothing and had to make a choice: Expose herself as a woman or leave the race? She chose the former. Upon removing her sweatshirt, the other racers were shocked at her real gender. Gibb feared the worst: harassment, being shoved off the course, or even calls to the police.
Instead, her fellow male runners applauded, and the women bystanders cried out for joy. Droves of fans came out upon hearing news of a woman racer. And when Gibb finally crossed the finish line, the governor of Massachusetts was there to shake her hand.
Gibb, the first woman to ever run the Boston Marathon, finished in the top third of entrants and paved the way for a paradigm shift in long-distance road racing to include a separate category for women.
This is the kind of story that makes me hopeful for the future, an inspiring account of how one person can break apart previously hardened molds with the might of their passion, integrity, and fortitude. And it sure doesn't hurt when they end up kicking the butts of the people who underestimated them in the first place along the way.
Here's where I draw a direct parallel to the world of finance. Specifically, the fact that the marathon of market forecasting has for too long been dominated by "fundamental" racers. These are the pundits and professionals who proclaim market trends are driven by news and events. In commodities, this can run the gamut from weather patterns, political uprisings, worker strikes, crop diseases, and most importantly, supply and demand data.
Commodity markets are physical, so their output can indeed be affected by these factors. But the problem arises when these factors are sighted as goal posts for future trends. Because those goal posts are constantly shifting.
Take, for instance these 2023 news stories regarding cocoa prices. They're all over the map:
- First, the rising dollar is bearish for cocoa: "Cocoa Prices Fall Back as Dollar Strength Sparks Long Liquidation" (Feb. 23 Barchart)
- Only for the dollar's strength to leave the soft undecided: "Cocoa Prices Settle Mixed on Dollar Strength (March 7 Barchart)
- Then a cloudy supply picture is said to hurt prices: "Cocoa prices slide as ICCO reports on 'growing number of uncertainties' impacting global supply." (March 3 Confectionary News)
- Only for that supply picture to be cleared up with a fall in exports from the world's leading cocoa producer: "Cocoa Prices Boosted by Reduced Ivory Coast Exports" (March 24 Globe and Mail)
- Then, supplies are said to be falling, so prices rise: "Cocoa Prices Jump To 6-1/2 Year Highs on Tighter Supplies" (April 18 Barchart)
- Only for supplies to be rising, so prices are falling: "Cocoa Prices Slip as ICE Cocoa Inventories Increase" (May 15 Barchart)
Traders and investors don't have to accept this back-and-forth, whipsawing from "fundamental" analysis. There's another contender in the market forecasting marathon -- Elliott wave analysis. And yeah, sometimes it feels like we're coming out from behind the bushes with a big black pair of Groucho glasses on hoping to slip into our lane without notice.
But it's time to notice. Elliott wave analysis doesn't use "fundamentals" to navigate market trends. It uses a technical analysis model of Elliott wave patterns which unfold directly on price charts. Even the really volatile charts like cocoa's.
Here, we go back to our September 2022 Monthly Commodity Junctures' analysis of cocoa. Cocoa was a featured market in the publication at the time. The preferred wave count called for a decline, but if prices moved above a certain level, an alternate wave scenario identified a complete triangle pattern and set the stage for a post-triangle thrust.
And that's largely what happened. Cocoa prices nailed down a bottom last October and embarked on a powerful rally to 6-and-a-half year highs this month.
As for whether cocoa's rally is running on empty -- our May 19 Commodity Junctures presents an updated video on the long-term trends unfolding in the world's leading softs, starting with cocoa. There, editor Jim Martens presents the following chart, adding his best interpretation for price action:
Elliotticians will recognize the pattern at the end of the chart. Addressing its significance, Jim explains:
"There is the chance that an ending diagonal is in its final leg. We're not going to call a top. We're noting that an ending diagonal is a warning, signaling that a likely fifth wave is underway and is late in its development."
Jim then reveals two price levels that, if breached, would be "an early hint that the pattern is complete." In Jim's words, "We don't want to overstay our welcome at this dinner party." And, thanks to the clarity of Elliott wave analysis, he can identify exactly when a graceful exit is appropriate.
Of Bobbi Gibb, historians remark how she "broke all the rules," and revolutionized racing.
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