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Is Coffee Percolating Higher?

04/16/04 09:49:49 AM
by David Penn

If coffee futures hold support at 6930, then a third wave of much higher prices could be right around the corner.

Security:   KCK4
Position:   N/A

Coffee futures are part of the "buy breakfast" trifecta that many looking to take advantage of an improving world economy have pursued (the other member of this trifecta being orange juice and sugar). Interestingly, the "breakfast" cohort has been among the worst performing of the commodities -- compared to gold or crude oil or soybeans. Orange juice is still mired in a secular downtrend -- as was sugar up until 2004. And coffee ended a long downtrend early in 2002, and spent the balance of the year -- and most of 2003 -- in a largely sideways consolidation range.

Of the three, however, coffee seems to be the leader of the pack. While orange juice continues to trend lower, and sugar appears to have broken out of its downtrend in February and March of 2004, coffee futures have been on the move to the upside since December 2003. Putting in a late November bottom near 56.40, coffee futures soared over the next few months, reaching a peak of 79.20 cents by late January 2004. Since making that peak, coffee futures have corrected about ten cents, with the near May contract recently closing at 69.30.

Should may coffee find support at these levels, then the likelihood of a strong, third wave rally to the upside would be great.
Graphic provided by: eSignal.
As the accompanying Elliott wave analysis suggests, May coffee's current correction has reached a pivotal point. I have cast the November 2003 to January 2004 advance in coffee futures as a five-wave sequence culminating in a minor wave 1 top (the five sub-waves would be of the minute degree). The correction from January to present represents, then, a three-wave minor wave 2.

Now, to the "pivotal point": if the November-January advance is a wave 1, then the coffee market should be entering a secular bull period that should see prices head much higher. The question is: when will the correction that is the minor wave 2 finally end? Fortunately, Elliott wave theory provides an answer: somewhere near the lows of the previous fourth wave of one lesser degree. So, all an Elliottician need do is find that fourth wave of one lesser degree (minute degree) and to look for the low point of that wave as a likely support point for the correction of minor wave 2.

As the chart shows, the low of minute wave "iv" is approximately 69.30 cents, very much near the point where May coffee closed on April 13th. If the wave count as presented is accurate, then this level should mark the end of minute wave 2. Even more importantly, the end of minute wave 2 means the beginning of minute wave 3, which should be a powerful rally characterized -- as Prechter and Frost remind us -- by strength and breadth, by increased volume and exceptional price moves.

One caveat, in the event that we do find ourselves in a third wave rally in coffee. While third wave rallies in financial markets are often characterized by confidence and optimism, it should be remembered that soaring commodity prices tend to bring joy only to those who produce and trade them (and only those traders who are long, not short). Thus, the third wave psychology in commodities markets should be marked less by feelings of hope and more by feelings of anxiety and even dread (note that fifth wave psychology in commodity markets is marked by all-out panic such as fears that the global economy was spiraling into hyperinflation during the fifth wave move in gold in 1980 and a simultaneous fear that the world would be controlled by oil-rich Arab sheiks during the oil price spike/panic.)

David Penn

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

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