Trading news

Coffee time?

The price of coffee has risen since the November 2013 lows by almost 80% while the latest high from October 2014 is slightly more than 112 % higher from the same low. This momentous move was caused by two things coinciding relatively close to each other. Firstly, after a long period of decline the price of coffee reached an important historical support level (December 2008 low) which led to the price of coffee breaking out of the descending trend channel. Secondly, the market was flooded with new demand as news about worsening drought conditions in Brazil hit the news wires. The country is the biggest coffee producer and exporter in the world. Just lately, we have seen the price of coffee declining due the reversion of the same theme. According to Bloomberg, hedge funds decreased their positions in coffee futures as rains brought relief to the droughts in Brazil. So, is it all about the weather? Would we need to know the future rain patterns in Brazil in order to benefit from this market? It certainly seems like a sensible proposition. However, there is another option. We can define the technically important levels, wait for the market to approach those levels and trade this market based purely on price action.

KC weekly

Coffree, Weekly

The price of coffee has been swinging wildly between the July 2014 low and the October 2014 high. We now have a higher high but it was created with a lower volume than the previous high from April this year. This can be seen both in the volume and Money Flow Index (MFI) and has resulted in a lower high in MFI, meaning we had a bearish divergence associated with the latest move into the resistance. It is interesting that this move into resistance happened on the same day that Bloomberg had a news piece with a headline: “Coffee futures jump to 32 month high, on Brazil crop woes”. Yes, the news was true but the price didn’t move higher but rather stalled at resistance. Nine days later the futures opened with a sizeable gap and headed south. This was a clear example of how traders should pay attention to technical levels and use the technical toolkit available to them. Now the price of coffee is at a weekly pivot from September this year and has been edging slowly lower. As the price is close to an area that attracted buyers the last time, I would be monitoring the price action in lower time frames in order to find signs of momentum reversal. Support at September low and nearest resistance at a gap coinciding with weekly Bollinger Bands and a former resistance from July and September.

KC 240 min

Coffee, 240 min.

The fact that price has reached a potential support area can be seen in how the price reacts. While the price is still moving lower in a descending trend channel it is forming a wedge like formation as the navy colored trend at the lower end of the channel is approaching the top of the channel. This suggests that the balance in supply and demand is slowly turning to favor the long side. There is a 4h support area right below the current price action and we have had one quick move inside this level. The move was rejected, but the price (a hammer candle was created) has again edged closer to the level. This suggests to me that we might not see an explosive move higher from here, but rather a gradual change in the direction of the price. The nearest 4h resistance level is at the high of the wide range up bar that followed the hammer candle and coincides with the Bollinger Bands. The next resistances are likewise at the highs of the pivot bars. This could act as targets for short-term scalping trades.

KC 60 min

Coffee, 60 min.

The picture we get from the 1h chart is not that different to the 4h chart. A confirmation of the first signs of momentum reversal would be a move outside the wedge and the descending trend channel accompanied with a higher low or steady up move outside the channel.


The fundamental picture has, at least momentarily, changed with the recent rain in Brazil. Therefore it can be questioned whether the price of coffee will be able to create yet another higher high. At the same time though, we are at a technical level. This level has attracted buyers in the past and if the signs of momentum reversal continue, then we have a case for a long trade. Look for breakout above the channel as a confirmation of this view.

Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.

Janne Muta
Chief Market Analyst

Friday, 07 Nov, 2014 / 3:08

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