Sugar Set To Snap Downtrend, Elliott Wave Suggests Bottom Nigh

Posted: Jan 8 2014, 3:21pm CST | by , in News

 
Sugar Set To Snap Downtrend, Elliott Wave Suggests Bottom Nigh
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“Raw sugar prices on ICE slumped to a 3-1/2 year trough on Wednesday, extending a long-term downtrend on heavy technical selling and bearish options dealings.”

This was the lead of a story carried by Reuters earlier today, and I thought to myself let us see what Elliott Wave Analysis can bring up. Much to my delight, I saw that Elliott Wave analysis of raw sugar offers traders an edge that is hard to beat. I present today six charts that will convince you the value of my approach to the markets.

As you might recall from my recent posts on Twitter and Facebook, Elliott Wave Theory works exceedingly well on liquid instruments such as stocks that are widely held. The theory was presented by Ralph Nelson Elliott back in 1930s. Quite simply, the theory states that all moves in the direction of the trend unfold in five waves. These waves bear relationships to each other and Elliott Wave analysts use Fibonacci ratios to establish or confirm such relationships. For example,  the third wave in the chart below is seen to be equal to the first wave.

Next, observe that wave 2 itself retraced wave 1 by 70.7%, a less known but valuable relationship. But more important is the signal that this correction gives about what will happen in the future. According to Elliott Wave Theory, when wave 2 is deep, we should expect wave 4 to be shallow.

Our next step is to examine the internal waves that make up the third wave. Every impulse wave is made up of its own set of 5 sub waves, and it will be possible to determine where the 5th wave of this mini series will end. Quite simply, we measure the distance traveled from the start of wave 1 till the end of wave 3 and compute some Fibonacci relationships as shown in the next chart. You will see the same relationships work in the bigger time frame shortly, but here, you will notice that we have arrived at the same end point for the mini 5th wave as what we saw in the first chart above. When such a confluence occurs, traders would get ready for a counter trend move.

As mentioned before, because wave 2 was a deep correction, we would expect wave 4 to be shallow. This is known as the principle of alternation in Elliott ave theory.

Finally we will try and figure out the end point for the fifth wave. Using the same technique I pointed out earlier for the sub waves of the third wave, we arrive at a possible target for wave 5 as $15.22.

We are already near $15.70, and everything looks quite bearish right now. Still, I have shown you some interesting ways to look at this market, and identified a key level.

One of the main goals of Elliott Wave analysis should be to identify turning points. As we approach the end of a five wave move, we have to prepare for a counter trend trade. Based on the above analysis, there seems to be a reasonable chance for the five wave down move to be completed at the levels shown. There is an opportunity for a low risk trade near there.

Before I end this article, let me show you one last chart,. This one goes back to the early 1980s. If you take a 61.8% retracement of the rally from there to 2011, that level comes exactly at $15.22. Now that is what I call Elliott Wave Magic.

Source: Forbes

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