Coffee's Double Bottom Comeback?

08/07/03 01:38:53 PM

by David Penn

Do a positive MACD divergence and moving average support point to higher coffee prices?

Security: KCU3
Position: N/A

In late June, I asked what it would take for coffee futures to put in a bottom ("Coffee Grinding Down," Traders.com Advantage, June 23, 2003). At the time, I suggested that the June trough lows in the MACD would be one clue as to whether or not coffee futures (particularly the September contract) would bounce and resume the advance that began earlier in June. As it turned out the pair of MACD trough lows in June were inconclusive. However, the higher MACD trough low that developed in July did confirm the higher low coffee prices established in July, and pointed to higher prices in the near-term. Over the next seven days, September coffee rose from 59 cents to over 66 cents.

Coffee futures have since retreated from their late July/early August heights. But the rally that began in July may still have legs if coffee is able to find support on the back of the 20-day exponential moving average shown here in magenta. Finding support on the 20-day EMA would be especially impressive as coffee was unable to use this moving average as support for very long in the wake of its last move up from the bottom in early July.

This consolidation in coffee futures may yet turn out to be a bullish double bottom reversal if support at the 20-day EMA holds up.

Graphic provided by: TradeStation.

If coffee does indeed find support around 62.5, then it is quite likely that the double bottom reversal formation that began in late May will prove itself to be valid. A swing rule interpretation of what this would mean in price terms uses the low point of about 58 from mid-June and a "swing" level of 64 (as represented by the late June/early to mid-July highs. Subtracting the low point value from the "swing" level value gives a breakout projection of 6 points which, when added to the value at the swing level, gives an upside target of 70 in an initial move. Such a move would set up September coffee for a test of the May 2003 highs just north of 72.

David Penn

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

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Coffee's Double Bottom Comeback?

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