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Coffee Grinding Down

06/23/03 10:57:41 AM
by David Penn

After a rally in late spring, coffee futures are making new contract lows. What will it take for a turnaround?

Security:   KCN03
Position:   N/A

About six weeks ago, I suggested that a successful 2B test of bottom was in store for coffee futures ("May Coffee's 2B Test," Advantage, April 7, 2003). Although coffee ended up testing that bottom one time more than I pointed to (the late March low was followed by successful test in mid-April), coffee futures did indeed head higher, moving from lows just under 60 to a high of 71 (basis July).

But those bullish days have been hard to come by since. After peaking out at 71 early in May, July coffee revisited the previous lows--actually establishing new contract lows in June. In a sense, the July 2003 coffee contract has come first circle, having been at approximately these low levels (around 56) one year ago.

A higher trough in the MACD would help build the case for a turnaround in coffee.
Graphic provided by: TradeStation.
Will the coffee bear market end with a bang or a whimper? Right now, volume seems to suggest that a whimpering end is more likely than other alternatives. Coffee futures have continued to drift lower since their initial break late in May and in mid-June fell out of a two-week consolidation range between, roughly, 62 and 58. This suggests that 54 might be a level of potential support.

While waiting to see what happens between current prices and this to-be-tested support level, watching to see whether or not the MACD indicator makes a new trough low in late June will be another indicator as to where July coffee's bear market might, even temporarily end. Note how the rising series of MACD troughs in March and April anticipated coffee's break to the upside in late April and May.

An additional factor is the volume oscillator, shown in blue and superimposed on volume. The volume oscillator simply compares to exponential moving averages of volume, one moving average that is short in duration and one that is longer. Here, 14 and 28 period moving averages are used, though I have seen combinations of 5 and 20 used also. The volume oscillator tends to lead prices: in bull markets, the volume oscillator should be moving up and in bear markets, the volume oscillator should be moving down.

Typical divergences occur when prices are moving up dramatically, while the volume oscillator is moving downward, or when prices are moving downward dramatically, while the volume oscillator is moving upward. In these two cases, prices and volume are not "in gear" and reversals in price action are more likely. This is to say that, with the volume oscillator making higher lows (late May versus late June), a significant upthrust in the oscillator during the current decline in coffee prices could signal a short-term bottom and possible reversal in trend.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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