If you’re a coffee lover, have you ever thought of trading coffee on the commodities markets to secure a price for delivery? I’m joking of course, but future contracts on coffee are a way to add some diversification in a commodities portfolio. Traded on the NYBOT (New York Board Of Trade), it’s one of the agricultural components of the CRB Index. Its weight is about 5% of the CRB Index.
There is a medium to long-term triangle configuration where the price moves into a trading range that has been narrowing regularly for the last 6 months. This triangle is built on the upside by a descending resistance line that goes through regular lower highs (points A, B, C and D on the chart). On the downside, the triangle is built by an ascending support line that goes through higher lows (points E, F and G).
Currently the trading range is supported around 123 cents and capped around 138 cents. The last closing price is 125.50 cents after the price action hit a high at 138.25 cents last week (point D). This is a pull-back of nearly 10%. It is likely now that the price action will test the ascending support line around 123 cents. The triangle will remain valid if a rebound is generated on this support line.
However, if the price action clears this level and break below, then a significant further plunge is expected. The current correction has been triggered because of the resistance line that prevented bull players to drive the price higher, but also because the configuration was overbought. The Relative Strength Index (RSI) had indeed peaked and its crossover below its signal line (below the 70 value) gave confirmation that a swing was developing.
The RSI has confirmed the price action therefore no major divergence appears. The probable scenario is a rebound when the price action will hit the support line around 123 cents. However, if the bearish trend continues and breaks below 123 cents, then the next target may be the level of 105 cents (dash blue line). This is 16% lower than the current level.
