Want to Identify Market Trends? Watch Elliott Wave Analysis at Work

How it anticipated a multi-year crash in one of the world's biggest commodity markets

By Elliott Wave International

The large fowl we call "Turkeys" were given that name by the British, who thought the bird came from the country of Turkey. Truth is, turkeys are native to North America. And yet, the question no one will ever hear around the dinner table on Thanksgiving is, "Who wants gravy on their North America?"
This story recalls another fallacy -- or fowl-acy! -- that likewise persists in the face of facts to the contrary; namely, the mainstream financial theory known as "fundamental market analysis." The notions behind this widely held belief go 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, our friends at Elliott Wave International have a birds-eye view into a very different way of interpreting market behavior. The "bible" on all things Elliott is Frost and Prechter's classic Elliott Wave Principle -- Key to Market Behavior (EWP, for short), which provides this ground-breaking counterclaim:

"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 Elliott wave analysis at work in actual world markets, let's review the recent history in an often-volatile commodity markets: sugar.
This chart captures the huge rally in sugar prices during 2015-2016, an 80% increase which earned sugar the title of "best-performer of all commodities that trade on U.S. exchanges." (Oct. 3, 2016 Seeking Alpha)

At its peak in mid-September 2016, sugar prices orbited a four-year high. And, thanks to a raft of bullish "fundamentals" -- such as rising demand, falling supplies, and a drought in Brazil -- all mainstream signs pointed to sweeter gains for the sweet soft.

• "The multiyear [sugar] bear turns bull. The second year of deficit can launch the sweet commodity even higher." Aug. 15 Seeking Alpha

• "Sugar prices hit four-year high on supply concerns. Prices have started rising in full swing." Oct. 4 Nikkei Asian Review

• "A sweet market for sugar bulls. The fundamentals that drove the rise in prices earlier this year have remained largely unchanged." Sept. 16 Financial Times

Yet -- instead of the trend heading even higher, sugar prices collapsed in a two-year long bear market that pushed prices to the lowest lows in a decade, before pausing in late September 2018.
Notably, sugar's selloff went entirely against its fundamental script.
It did, however, follow its Elliott wave script to a T.
See, in the July 21, 2016 Monthly Commodity Junctures, Elliott Wave International's chief commodity analyst Jeffrey Kennedy outlined a long-term bearish path for sugar that would unfold in two main phases. Jeffrey explained:

"We're currently working wave b. I wouldn't be surprised to see this advance continue into September or even October of this year ... to an objective of 22.89.

"Once wave b finishes, I will then look for a significant decline that should last for a number of years and easily push prices well below the low we experienced in 2015 at 10.13."

The next chart captures the aftermath. Sugar rallied above Jeff's cited target into mid-September, before succumbing to the two-year long bear market that saw prices do a complete 180-degree reversal into the "worst-performing commodity" of 2018.

Most of the time, a market's price action unfolds in one of the five core Elliott wave patterns. For the first time since its 1978 release, Elliott Wave International is giving away Elliott Wave Principle -- Key to Market Behavior, so investors can keep the path toward market forecasts clear of news-related obstacles.
The early turkey catches the worm! Get instant access to Elliott Wave Principle -- Key to Market Behavior, the timeless bestseller and ultimate resource guide today!
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How Do YOU Know the Direction of a Market's Larger Trend?

Fundamental analysis versus Elliott wave analysis: the winner for predicting the 9-year long commodity bear market is clear.

By Elliott Wave International

95% of traders fail. It's a day-drinking, country-music kind of statistic. Think: "Friends in Sell-Low, Buy-High Places."
One article attempts to quantify the reasons, citing: "SCIENTIST DISCOVERED WHY MOST TRADERS LOSE MONEY -- 24 SURPRISING STATISTICS." See number 14:

"Investors tend to sell winning investments while holding on to their losing investments."

In other words, their timing is off key. And when it comes to seizing market opportunities, nothing is as important as timing. Our friends at Elliott Wave International said it best in the pages of their educational reference guide, Elliott Wave Principle -- Key to Market Behavior:

"To be a winner in the stock market, either as a trader or as an investor, one must know the direction of the primary trend and proceed to invest with it, not against it."

Which brings us to the next part: How do you know the direction of the primary trend?
The contribution of mainstream market wisdom abounds -- the best gauge of a market's trend is news events surrounding that market. These news events, called fundamentals, can vary from weather patterns, political events, supply/demand data, trade wars, earnings reports, and on. The way it works is:

A. Positive news supports price and fuels a rising trend
B. Negative news deflates price and ignites a falling trend

This supposedly applies to all markets, especially commodities where supply is physical and finite. Reality, however, is a horse of a different color.
Take the broad commodity sector in 2010-2011. At the time, commodities were enjoying a strong rebound, with the CRB Index orbiting a three-year high. Mainstream financial experts used a barrage of bullish news events -- from soaring energy costs, growing economic uncertainty, mounting inflation fears, and an accommodative Fed -- to identify a healthy, rising trend. Here, these 2010-2011 news items provide a screenshot of the bullish consensus:

• "Commodities on Fire! Investors want assets to protect themselves against rising inflation and possible shortages in the future, so the surge in commodities looks set to continue." (April 11, 2011 Financial Post)
• "The world is in the middle of a commodity boom cycle" (June 8, 2011 Wall Street Journal)
• "Traders are shrugging-off the frightening nightmare of 2008, but instead, are riding high on the magic carpet buoyed by 'Quantitative Easing.'" (January 6, 2011 Bullionvault)

Wrote one January 2011 CNN Money:

"Commodities of all types have been running like scalded monkeys. Hard and soft commodities, and shiny and not so shiny metals are on a tear...it appears that we are in the midst of a commodity super cycle."

The fundamental markers were positive. The CRB Index's trend was up. The road ahead was higher.
Except, it wasn't. The exact opposite scenario unfolded. Between 2011 and 2016, the CRB Index plummeted more than 50% in an unrelenting bear market that has seen prices slog sideways since. It goes without saying, fundamental analysis failed at its most important job -- enabling traders to know the direction of the primary trend and "proceed to invest with it, not against it."
Alternatively, there was Elliott Wave International's chief commodity analyst and co-author of Elliott Wave Principle -- Key to Market Behavior Jeffrey Kennedy. In his September 2011 Monthly Commodity Junctures, Jeffrey identified a textbook, five-wave move coming into a top on the price chart of the Continuous Commodity Index (CCI), referred to as the "old CRB."
Chapter 2 of Elliott Wave Principle -- Key to Market Behavior (EWP) shows the basis for Jeffrey's bearish forecast -- five-wave moves up are followed by three-wave corrections -- AND his ability to identify a likely downside target for that decline: From EWP:

"No market approach other than the Wave Principle gives a satisfactory answer to the question, 'How far down can a bear market be expected to go?' The primary guideline is that corrections, especially when they themselves are fourth waves, tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus."

Armed with this guideline, Jeffrey's warned the next move for commodities would be a historic trend change that would slash prices in half. His September 2011 Monthly Commodity Junctures wrote:

A BEAR MARKET IN COMMODITIES: THE TRAIN IS COMING

The monthly price chart of the CCI clearly displays another five-wave advance (chart 2). This impulse wave, which began in 1999, ended this year.

This argues that a decline in the CCI should actually target the December 2008 low of 322.53, the terminus of the previous fourth wave.

From there, prices embarked on a 50%-plus crash to 351, near the 2008 low of 322.53 area Jeffrey identified five years earlier!

Accurately identifying a market's trend is pivotal to success. Period. The odds of doing so require the right tools. Right now, our friends at Elliott Wave International have added the ultimate resource guide Elliott Wave Principle -- Key to Market Behavior to their FREE, online Club EWI library. This best-selling "bible" of all things Elliott is a mainstay for market newbies and veterans alike.
In the end, failure is not a result of "bad timing;" but rather, applying bad tools to perform market-timing. Elliott waves give you an alternative.
Get your free copy now