Frozen concentrated orange juice (NYBOT:OJH14), most see it every morning as they stumble to the kitchen to start their day. Fundamentally this commodity may well be on its way to extinction in Florida as a supply shortage is tearing its way thru the citrus industry in the form of citrus greening. Citrus greening is transmitted from tree to tree by infected insects making the fruit unsuitable for sale as fresh fruit or juice. The bad part about this scenario is that the citrus industry hasn’t come up with a solution to stop this process from happening. This threatening disease could decimate the once plentiful crop making prices double or triple in coming years, leaving Florida citrus growing a relic of the past.
So the question then becomes how can an investor benefit from this knowledge? Let’s take a look.
Wild and crazy price swings do happen in the futures market especially orange juice. Prices rise and fall without rhythm or reason and can make an investor second guess their thoughts about investing in commodity futures. This is why most traders integrate their fundamental trading with some form of technical analysis. Technical analysis helps determine support and resistance levels.
Being a technical trader in the stock and commodity market for more than 20 years, here is a glimpse into a theory that may help to get a picture of what is happening with price movement. The practice is referred to as Elliot Wave Theory. This technical analysis of price can be applied to any market that tracks price movements on graphs. This theory uses waves to track market price and has certain rules that govern these waves. Let’s take a look at the price chart for orange juice since 2009 and see what Elliot has to say.
What is Elliot wave?
Elliot Wave Theory says that prices move either up or down in a series of 5-wave increments. These consist of impulse waves that move in the direction of the trend and corrective waves that move against it.
Looking at the orange juice weekly chart, we see a move higher since the start of 2009. This move appears to be impulsive for a wave 1 ending around the 226 level. We are currently correcting this price move in a series of overlapping waves and corrected to around the 97.10 area. The wave to look for now is the start of the third wave. A break of the old high at 226.95 will be our first indication that the wave three has started, and much higher levels will be underway.
If this is assumption is correct, then how high do we think prices can go? As this is always an unknown, measurements of the length of wave 3s have several different scenarios, but most common is the distance traveled by wave 1 (162.35) multiplied by 1.618, which leaves 262.68. This number, measured from the bottom of wave two (if we indeed have seen it end at 97.10) would give you a price target of 359.78. Again if this is the case, fundamentally and technically speaking orange juice could be set to move substantially higher in the coming years.
Weekly orange juice chart as of 1/24/14