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Cocoa: You Don't Want To Miss Next Wave
Are Cocoa prices positioned for a decline?
You may already know that one of the Three Rules of Elliott states that, "Wave 2 can never retrace more than 100% of wave 1." By applying this rule in your trading, you always know the exact price point where your "wave 2" is no longer a wave two. Which means that you always know the exact price point where to place your stop-loss – a cornerstone of proper risk management.
But assuming that your market is indeed in a wave 2, how do you know where it might end -- i.e., what percentage of wave 1 it might retrace? That's a crucial piece of information, because if you can determine the end of wave 2, you can set yourself up for a wave 3 move. And no one wants to miss third waves: They are the strongest and typically longest waves in an Elliott wave impulse, and "riding" them is pure pleasure. Bob Prechter calls third waves "a wonder to behold" in his Elliott Wave Principle – Key to Market Behavior.
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So, how do you know when a wave 2 is over? One way is to watch for completed internal subsdivisions and what Elliotticians refer to as "the right look." For second waves, which are always corrective, "the right look" means a choppy, overlapping wave structure. For example, take a look at this 120-minute chart of Cocoa futures. (Its fully-labeled version is published in tonight's (May 7) Daily Futures Junctures; online now):
"As shown," writes Mike Boysen, who is filling in for Elliott Wave International's Daily Futures Junctures editor Jeffrey Kennedy this week, "the rebound into 27.85 is corrective-looking, and [there is an] impulsive drop from there to today's early low at 26.25..."
The fact that the developing drop in Cocoa is "impulsive" is very important. Impulses (or five-wave moves) point IN the direction of the trend. Third waves, of course, are impulsive. Which means that the next move in Cocoa can indeed be "a wonder to behold."
Find out what price targets a third wave in Cocoa may reach in the May 7 Daily Futures Junctures, online now, yours risk-free.