The Joys Of Juice

04/22/05 08:50:36 AM

by David Penn

Wanna know where the bulls have been running recently? Try the orange groves.

Security: JOK5
Position: N/A

The last time I talked about orange juice futures was back in November 2004 ("Orange Juice's Triangle Triumph," September 28, 2004, Traders.com Advantage). I encourage you to take a peek at that article if for no other reason than to see the move that orange juice futures have made since a bottom in the late spring of 2004. Then--about a year ago--orange juice futures (basis continuous futures) were priced as low as 55 cents. Those same futures are trading currently between 90 cents and a dollar.

What is interesting about orange juice futures here in the spring of 2005 is the way they are reminding us of how resistance, once broken, often turns to support. Note the low May orange juice established in mid-April (shown in Figure 1). The futures reached a high early in March near $1.02 and moved into a sideways to lower correction for the next month and a half. A Japanese hammer candlestick on Tuesday, April 19, was formed at the same time as an intramonth positive stochastic divergence developed.

Figure 1: OJ. A positive stochastic divergence, Japanese hammer candlestick, and resistance turned support conspire to provide at least a temporary bounce for May orange juice futures.

Graphic provided by: Prophet Financial, Inc.

Even though there was no positive stochastic divergence between the late March lows and the April lows, the intramonth positive divergence does suggest that the downside is increasingly limited. But both the bullishness of the hammer candlestick and the intramonth positive divergence are underscored by the resistance turned support at 90 cents--the exact level where the rally in orange juice futures that began in the late spring of 2004 topped out late in the year.

The notion of resistance turned support is one of the more fundamental notions in technical analysis. While occasionally clever observers try to discount the role of resistance and support, the fact of the matter is neither are created in the fertile minds of technical analysts, but by the very action of buyers and sellers in the marketplace. Technician John Murphy, for example, explains the phenomenon plainly in his book, The Visual Investor:

The rationale behind this tendency to reverse roles stems from investor psychology. If support exists at a prior low, that means investors have bought at that level. Once that level is decisively broken and investors realize that they've made a mistake, they're usually anxious to break even. In other words, they will sell where they previously bought. Prior support becomes resistance.

Knowing what orange juice traders were thinking when they began bidding juice higher in mid-April might be impossible. And there always is the possibility that the idea of resistance turned support can become somewhat self-fulfilling. But if orange juice futures remain above 90 cents for a significant time, then it will likely be because--whatever their intentions--traders turned resistance into support one more time.

* A last note. Basis continuous futures, orange juice has been moving higher in a trend channel that begins from the lows in early August 2004. The lower boundary of this trend channel has been tested in November 2004 and (to a lesser extent) the first few months of 2005. Assuming the support at 90 holds and orange juice is able to make a run at the 2005 highs, then it would be hardly surprising if orange juice bulls were able to force a test of the upper boundary of that channel in the months to come.

David Penn

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

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The Joys Of Juice

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