The Consensus on Commodities is Wrong
You hear it almost everywhere these days – the end of the great commodities boom is near. These naysayers cite the big slowdown in China’s manic construction phase, along with a forthcoming big phase of belt-tightening in Europe, America and Japan, as they take their fiscal medicine.
If you are a coal or copper miner or steel producer in Australia, a country that lives off iron ore and coal sales to China, you’d be forgiven for holding this kind of view.
This is a view that’s starting to become the new consensus on Wall Street and other financial centers around the world.
But if you follow commodities the way I do, or if you’re a subscriber to my Commodity Trend Alert newsletter, you’ll know that I disagree.
The great commodities boom is far from over and, in terms of 2012, we are ending the year on a great note.
In fact, some of our greatest trades for the year came within the last few months.
Our three biggest winners this year have been our options trades. Over the past four months, three out of the four option trades we made have been profitable.
Between the three winners, we gained an amazing 563.54%!
Our biggest winner of the year was Coeur D’ Alene Mines (NYSE: CDE), ended up producing a 350% gain all by itself.
Now I want to show you how I did it.
Capturing Massive Gains From Elliott Waves
Coeur D’ Alene Mines (NYSE: CDE) turned a meager profit into something significantly better, which proceeded to drive the P/E ratio from a whopping 98 down to 9!
This means that its earnings are growing fast relative to the stock’s price which is producing a much cheaper P/E. It was clearly worthy of investment.
But it was its price movements that told us when to get in and when to get out.
Major stock corrections tend to unfold in three major moves called waves by “Ellioticians.” These are called a-b-c corrections. I’ve noted the three major moves above.
By July 2012, we could see that the sell-off was likely complete. Then, the move above its 50-day simple moving average (SMA) confirmed that the downtrend was over.
We were right, the stock took off. So chasing it with an option didn’t make sense at the time. Waiting until the volatility is shrinking within the uptrend is the proper time to get in on an option play. In order to do that, you have to either catch a pullback within the uptrend or you have to catch a consolidation sideways. Well the latter is what happened for us.
The volatility shrunk as the stock consolidated right below its 200-day SMA. This caused the option’s premium to shrink which made it worth getting into. Shortly thereafter the uptrend continued.
Take the profit and run
How did I know it was very likely to continue? Once again, Elliott Waves had the answer. Upward trends unfold in five distinct waves. I have them labeled above. I knew we were in the third wave which is typically known to be the strongest and longest of all of the waves. And I knew we would want to be out of the option when most of the party was over, which would be at the end of that wave.
Because after Wave 3 comes the next pullback or sideways consolidation, then a final push higher, followed by a huge sell-off. So the way to get the most out of an option is to trade it through Wave 3 and then get out when the wave looks like it’s over. That is exactly what we did.
We entered the trade on August 28 and got out of it on September 14, when Wave 3 looked to be peaking out. As you can see, the sideways consolidation (Wave 4) happened right afterward, which would make the option lose a bit of its premium due to the lower volatility and lack of upward movement. Then the final push higher came, followed by the steep sell-off.
I knew we didn’t want to risk being in any of the sell-off and the best way to avoid that is to be out of the stock well before Wave 5 is complete. Well, in just over two weeks, we had a gain of 350% – so I took it.
Not long afterward, the stock dropped by almost 50% from the overall uptrend. So getting out then was the right thing to do. It was an exhilarating trade.
Looking forward to 2013
So in spite of the prevailing bearish sentiment you’re likely to continue to hear, the commodities market is still poised to yield some great profits over the next year.
The trick is knowing when to get in and when to get out. And that’s the beauty of my Commodity Trend Alert newsletter.
In 2013, we’ll see an upturn in China which will give a huge boost to steel and copper specifically. And in general, the market will be bullish for commodities. Palladium will also have a huge move and likely outpace the run-up in gold and platinum.
Oil is definitely a no-brainer trade for 2013. Oil will continue to rise from here as China’s and India’s economies expand again. Also driving the cost higher is the rising breakeven prices mid-East oil producers continue to have. Their floor now is around $85-$100 a barrel for most of those exporters. They won’t allow oil to remain at or below their breakeven points (for their budgets) for long.
In terms of 2013, I believe we have a very profitable year ahead.
Have a nice day!
Editor, Commodity Trend Alert