Squeezing The Juice

09/02/04 01:36:00 PM

by David Penn

A month ago, I announced "Run OJ! Run!" in reference to the early stages of a rally in long-beleaguered orange juice futures. And run they did.

Security: JOU4
Position: N/A

Ever wonder what smart futures traders do when they are long a market that has been in a miserable secular bear for years, and that miserable secular bear suddenly presents them with a windfall profit? If a picture tells a thousand words, then consider the chart of September orange juice futures a more than adequate answer. Both of the rallies in orange juice futures -- the first in early July and the second in late August -- were concluded with sharp sell-offs. In the instance of the early July rally, a rally which saw OJ run up from 57 cents to nearly 73 cents was sharply corrected in two days late in the month. September juice (JOU4) fell from 72.80 to 61.15, then went lower over the next seven or eight days until finding its eventual bottom at 57.8.

The most recent rally in August -- which transpired over approximately the same amount of time -- was nothing short of spectacular. JOU4 rallied from an early month low of 57.8 cents to as high as 85 cents. But this 85 cent print came as traders who had enjoyed two remarkably bullish gap ups (the first from 63.50 cents to 72.25 cents, the second from 77.30 cents to September 2nd's 85 cent open) clearly decided against pushing their luck. By mid-day on the second, traders had sold September juice down more than four cents from its open.

Note the exceptional volatility in the September orange juice rally since August. Such volatility is characteristic of third waves.

Graphic provided by: Prophet Financial Systems, Inc.

Back in July, I suggested that the "sharpness of the June rally begs a correction." That correction did come in July and proved to provide the basis for the ensuing August rally. Given the sharpness of the current rally, a correction of some significance should be expected in the months to come as well.

Elliott's rule of alternation would suggest, however, that whereas the initial decline (the second wave from mid-July to mid-August) was short and sharp, the next decline (a fourth wave) is more likely to be longer in duration and less severe in terms of price loss. A sideways or even triangular correction in September orange juice, then, shouldn't be surprising. Look also for any correction to find support in the 72 to 73 cent range based on the peak of the July rally. If support holds here (and that's assuming JOU4 doesn't continue to rip to the upside), then the likelihood that a fourth wave-type correction has developed is strong and that higher prices for orange juice are only a few squeezes away.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Squeezing The Juice

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