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“Markets move against the trend of one greater degree only with seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full motive structure. This struggle between the two oppositely-trending degrees generally makes corrective waves less clearly identifiable than motive waves, which always flow with comparative ease in the direction of the one larger trend. As another result of this conflict between trends, corrective waves are quite a bit more varied than motive waves. Further, they occasionally increase or decrease in complexity as they unfold so that what are technically called subwaves of the same degree can by their complexity or time length appear to be of different degree. For all these reasons it can be difficult to fit corrective waves into recognizable patterns until they are completed and behind us. “
                                          Elliot Wave Principle, Frost and Prechter

Commentary & Analysis
Corn dogged.

Boy, when wheat was surging higher early this week, bouncing back from some heavy selling last week, it sure looked like lingering weather problems were a lock for higher prices.

Errrrrrrrrrrrrrrrrrrr. (Screeching halt.)

Wheat and its yellow buddy, corn, took a slide yesterday when pretty much the entire commodities complex was seeing red. And for the most part the slide continues today with silver down another 7%, below its low mark from last week. Crude oil, natural gas and gasoline are all lower as well, responding to increased stocks in US gasoline inventories.

Prices of the grains are starting to slide again after stabilizing somewhat. The USDA report released yesterday, which supposedly drove the sharp sell-offs for corn and wheat, flew in the face of recent reports pointing to an abnormally slow pace of plantings being made even slower by poor weather. The USDA apparently was factoring in the demand destruction from high prices; that would allow US inventories to increase. Some of the risk premium from weather concerns has now been erased, which would allow new reports to drive prices higher assuming we’re not witnessing the beginning of a lasting rout on commodities.

To that point, Jack’s Currency Currents piece yesterday on rationales is looking quite timely. But let’s not jump the gun, big guy.


Based on Elliot Wave principle, corrective waves tend to be made up of three smaller waves (whereas motive waves, which comprise the overall trend, are made up of five smaller waves) and look a little something like this:

Technically (and I say this in a voice of utmost confidence like I cannot possibly be wrong about commodities simply because I know how Elliott Wave defines corrections) I am not surprised to see another push lower here; in fact, it would represent a more reassuring buying opportunity than last week’s bottom.

We seem to be seeing this corrective pattern already in corn, wheat and soybeans on a weekly basis (as the correction there started sooner than precious metals and energy. Silver is reflecting this pattern and crude oil is on the verge. Gold has been outperforming its peers lately, but the set-up is there as well.

Now, taking off my certainty cap for a moment, it is not all that reassuring to see some additional cracks in the Chinese growth story (unless of course you’re Jack!) Yesterday’s report of Chinese industrial production disappointed. And a look at this chart of Chinese PMI:

Not much doing as it barely keeps above the 50-level indicating expansion.

Going back a couple months, this second-quarter sell-off in commodities was being predicted. In fact, in Commodities Essential I alerted my members to this fact especially as it related to my expectations for copper prices. But because of the speed of ascent seen in almost all commodities, everyone seemed to forget about all the second-quarter sell-off projections.

Going back to something Jack said in his piece yesterday:

Now, this doesn’t mean the secular march higher in commodities prices is over. That assumes Jim Rogers is right and there is a secular bull market in commodities and it wasn’t just a liquidity-driven bubble thanks to Ben, most of all, and every other major bank and government around the world throwing money and credit into this trend. It might mean that a much deeper correction is due–which if you think of it positively, would be cleansing and beneficial to sustained growth if interest rates start to normalize.

I don’t believe Jimmy Rogers is right; I believe the move in commodities was liquidity-driven to some extent. Thinking positively, it is probably good (and perhaps shouldn’t be surprising) that the market is working off excesses a decent time before the end of QE2. It may open up the doors for a very legitimate, stable, secular bull run as Jimmy Rogers touts.

But look at it this way – a real collapse in commodity prices now may open the doors for more quantitative easing as Ben Bernanke doesn’t feel as much constant pressure from the critics pinning inflation on his shoulders.

Do we wait for QE3 before we start buying back into commodities? Or should we start next week?