There’s a big trading opportunity building up in one of my favorite markets. Last time this happened, we saw a 54% run in just two months.
At first glance, this market may not seem very exciting. But the truth is, it can make you an absolute fortune.
Which market am I talking about, and how can we pinpoint the best time to get in today? Read on to find out.
Using Volatility to Our Advantage
I’m talking about commodities… and one commodity in particular. We’ll get to which one that is – along with our potential profit opportunity – in a moment.
But first, why do I love trading commodities?
The reason is that they can be incredibly volatile. While there are some predictable cycles to commodity prices (such as agricultural harvests), other variables (like a hurricane or unexpected drought) can wreak havoc on various markets.
For many commodities, the supply-demand relationship is not very elastic. So these adverse environmental changes can be devastating.
Think about it like this: If there is an unexpected flood that wipes out a massive amount of corn crops, those crops cannot be replaced instantaneously. It will take a long time to plant and an even longer time to harvest.
But demand for that corn will not be any lower. Consumers won’t know, or even care, about the flooding. All they care about is being able to buy the same products they always do at the grocery store.
But they probably should care… because ultimately the price of corn will shoot up due to this supply shortage.
Many research firms are dedicated to monitoring just these kinds of events. They model the statistical probability of supply-side shocks and provide advice to their clients accordingly.
As a trader, I don’t have the luxury of diving deep into that kind of research material. Thankfully, I have a much better way of assessing commodity markets (or any market!). It’s one you’ll recognize if you’ve been reading Money Trends…
The Best Way to Trade Commodities
My preferred methodology is Elliott Wave Theory, also called the Wave Principle.
The premise behind the Wave Principle is very straightforward: Individual human behavior can be difficult to predict… But when humans gather in crowds or herds, their behavior becomes much easier to predict.
This is exactly why trend-trading is such a powerful strategy. When the market exhibits herd behavior, it will move as one entity in a given direction. This herding impulse can make for some pretty dramatic movements in asset prices. Just look at Tesla!
Because herd behavior is predictable, it also means it is cyclical. This is why it is possible to pattern this behavior and identify where in the greater overriding pattern a market might be.
It would take me several hours of research to get an understanding of the expectations analysts might have for just one asset class, let alone all the different markets I actively trade!
On the other hand, a very quick glance at a price chart (and I mean quick… three seconds is all I need to know whether or not I have a potential trading opportunity) tells me everything I need to know.
So, what do I look for when examining a price chart? Essentially, I want to identify whether the market is in an impulsive or corrective phase. (For a refresher on impulsive vs corrective phases, check out this article.)
To bring it back to the very foundational building blocks of the Wave Principle, I want to know if I can count either five waves or an A-B-C correction.
Remember, if we can count five waves, it gives us the direction of the prevailing trend. On the other hand, counting an A-B-C correction tells us this price movement is a counter-trend correction… and the next big move will be in the direction of the last impulsive wave.
To show you what I mean, let’s look at the big trading opportunity unfolding right now.
A New Bullish Trend in the Making
As I was flipping through my charts on Saturday afternoon, I saw something on the coffee futures chart that grabbed my attention. (Trader’s tip: use the weekends when the markets are closed to start planning your trading week ahead.)
First, I noticed that buyers stepped into the market once more in June of 2020. When I zoomed the chart out to a monthly timeframe, I saw that this was an area of price that has served as a strong demand zone going back to 2005.
I then wanted to figure out if there was more upside potential in coffee, so I zoomed in to the daily timeframe. On the daily charts, I could count a clear five wave impulsive advance, shown below.
It looks as though the fifth and final wave of this impulsive advance has ended, and we’re now in the corrective phase of the market.
This corrective decline will unfold in three waves. Once the correction is mature, we can label it as an A-B-C correction.
It is this correction that will give us a trading opportunity to hop on board for the next bullish swing.
The last time we touched down in this demand zone was in May of 2019. After completing its initial five wave impulsive advance, we got our expected A-B-C correction.
After the corrective mode ended, coffee went on an impulsive 54% run from October to December of 2019.
As you can see above, if you were able to position yourself long anywhere near the start of the move, you would have banked some fantastic profits on the ensuing bull run.
Here’s hoping we can do the same in 2020.
Editor, Money Trends
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