Few farmers may be into surfing, but as crop sellers they’re riding on a rising wave of corn prices this winter.
But that wave may be about to crest and subside, says the leading commodities analyst who follows Elliott wave theory.
Corn prices are set to fall more than 10 percent, and soon, he says.
That’s not bad news for anyone wanting to get in on a longer rally, said Jeffrey Kennedy of Elliott Wave International, because after this wave reaches a trough, another wave will sweep prices much higher.
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“As a trader, I’m looking to buy the pullbacks,” said Kennedy, who relies almost completely on Elliott wave analysis for his price forecasts.
“I’m bullish on grains to 2010, maybe longer, and as far as corn goes, (I expect the market to) pull back to $3.50 US per bushel and then on towards the $5 per bu. handle.”
The eventual upside peak could be $7 or $8 per bu.
Kennedy’s confidence is based on his use of Elliott wave principles, which he says are clear in the present rally in corn.
Elliott wave analysis was invented by Ralph Nelson Elliott in the 1930s in the wake of the catastrophic market crash of 1929. It is based on his observation of price behaviour across markets and securities.
It is a form of technical analysis that goes beyond the simple pattern recognition upon which most technical analysis is based.
Elliott wave theory is a complex series of rules and guidelines, incorporating such esoteric elements as the geometrical concept of the golden spiral and its mathematical counterpart the Fibonacci ratio. But essentially it is a complicated way of summing up the “three steps forward, two steps back” behaviour of the market.
Elliott argued that market prices tend to move in a predictable series of three impulse waves upward, separated by two corrective waves down. The eventual peak, at the end of the fifth wave, is followed by a three-wave corrective pattern of down-up-down, before the next upward series of five waves begins.
To Kennedy, the present corn market rally clearly reveals Elliott wave principles. The market bottom near the end of 2005 marked the beginning of impulse wave No. 1, which peaked in June-July 2006. Wave 2, the first corrective wave, began at that point and ended at the end of summer. At that point the second impulse wave began, taking corn prices much higher in a powerful movement to where prices are today.
Kennedy believes this third wave will soon end, turning down in corrective wave 4, which will take prices to $3.50 or $3.40. After that, a fifth wave will begin, which contains the possibility of a rise well beyond $5 per bu.
How he gets his precise price projections has to do with his use of the Fibonacci ratio, which is beyond the scope of this article.
But Kennedy believes Elliott wave analysis offers a compelling framework for price prediction that other forms of analysis lack. He has relied upon the wave theory entirely for the past five years of his commodities analysis.
If he’s right, farmers will be in for an unsettling reversal in market prices at the crucial spring seeding time. But if he’s right, that pullback will be followed by a time of historically high prices that could last for years.
