Today we continue with our series on Elliott Wave patterns and how to use them to identify the end of a bear market and the beginning of a new bull market.
The market we are going to focus on today is food commodities, specifically grains, and we’ll discuss where prices might be headed over the next several years.
The chart below is a long term chart of wheat which we will use as our proxy for the entire grain market. However, corn, soybeans, and oats all have similar price patterns on their long term charts as well.
Beginning in early 2005 (low of wave 2), the price of grains started to rise in a parabolic fashion. Wheat for example, shot up from a low of 287.75 to a high of 1349.50 in early 2008, a gain of 368%, creating our motive or impulse wave.
Since then, the price of wheat has been plotting a 9-year bear market as it traces out a textbook Elliott Wave A-B-C correction.
The price of wheat could trade sideways for several more months and even decline a bit further before reversing and starting a new uptrend. However, there appears to be strong support at the 390-410 level which coincides with the peak at the top of wave 1.
If your skepticism hasn’t caused you to dismiss these last few Sunday Editions as poppycock, then I hope you are beginning to see that all financial markets appear to trace out a very similar pattern consisting of eight waves which constitute a complete bullish and bearish cycle, at which point the cycle starts over.
The motive or impulse wave (1-5) happens in a fairly parabolic fashion followed by an initial decline or crash against the motive wave to form the A leg low. This low is then followed by a B wave bounce, which under the basic A-B-C pattern should not surpass the high of point 5. Once the B wave bounce is complete it is then followed by another significant decline to at least equal, and in most cases, slightly breach the A leg low.
I want to reiterate that this chart of wheat comprises 14 years of data, and the oil chart we looked at last week spanned 18 years. With the exception of the first week, when we looked at a one year chart of gold and silver miners, I have chosen to use monthly charts to highlight markets that I believe are putting in long term bear market bottoms.
In my opinion, it is not only easier to identify a completed Elliott Wave pattern when looking at the big picture view of a market, it is also more useful in that you are able to identify sectors where you can invest money and have a strong bullish trend working in your favor over a longer period of time. And even if you are more of a trader, you still have a bullish tailwind behind you.
Once an A-B-C correction completes, it doesn’t mean the given market is going to immediately skyrocket higher. It could be range bound for a few years as it backs and fills before really gaining upward momentum.
In addition to what I believe is a near “perfect” and complete Elliott Wave correction, it also appears as though sentiment is now playing in our favor as well. According to Agrimoney, hedge funds have now turned more bearish than ever on Chicago wheat futures, which they see as a possible sign of support for prices – I agree.
Hedge funds, deterred by data showing the biggest US wheat stocks in 29 years, turned their most bearish ever on Chicago wheat futures and options…
…In Chicago soft red winter wheat futures and options, the world benchmark, hedge funds raised their net short by 20,000 lots – the biggest selldown in three months. That took the net short to 151,417 contracts, by a distance the biggest on records going back to 2006.
However, the extent of the net short, at a time when prices are already at lowly levels, raised ideas that the position may be “crowded”, and liable to being reversed by hedge funds, placing upward pressure on prices.
The last time we saw this kind of short interest among large speculators was in 2006. The first half of that year wheat prices traded between $3.26 and $4.00 a bushel before embarking on an historic rise to $13.49 over the next 18 months.
If, as I suspect, wheat and other grain markets are now in the process of carving out a long-term bottom and readying themselves to gain strong upward momentum in the next few years, then positioning your portfolio with investments that will rise in price or benefit due to rising grain and food prices could prove to be a great long-term wealth creating opportunity.
In addition to investing directly into grains and other food commodities, there is one sector in particular, which is putting in a bear market bottom in conjunction with the grain crop markets, which I believe will benefit immensely from rising grain prices and that is fertilizers.
When crop prices are low due to favorable growing conditions and large grain stocks, farmers are squeezed and have less incentive to maximize production through the use of fertilizers.
Three fertilizer companies we like are Agrium Inc. and Potash Corp (these two have recently agreed upon a merger if approved), and Mosaic Co. You can read where we wrote about these companies here.
Here is a snapshot of the valuations of these companies:
Similar to the independent oil companies we discussed in last week’s article, we like these companies due to their low valuations and high dividend yields. However, I don’t believe grains have the same kinds of supply headwinds that oil does, and in fact have long term demand pressures from emerging markets such as China and India. Therefore, I believe these companies have strong recovery potential over the next several years.
Another way to invest semi-direct into rising grain prices is with the iPath Bloomberg Grains Subindex Total Return ETN (JJG) which is comprised of 41.43% soybeans, 36.45% corn, and 22.12% wheat.
Don’t miss next week when we’ll look at the big picture view of gold and talk about just how high it might go over the next decade.