Coffee has been on a tear lately…
From its low of around $0.88 per pound in early May, coffee shot up as much as $1.14 per pound. That’s about a 30% gain – a huge move for a commodity in just over a month. It’s now down about 7% from that level.
You might remember me writing to you about coffee back in early April. Here’s what I said at the time…
The 20-day exponential moving average (EMA) is a short-term support/resistance level for coffee. If the price of coffee is trending above the line, then coffee is in rally mode. If the price is trending below the line, then coffee is in a downtrend
When coffee made a sustained move below its 20-day EMA last November, it kicked off a six-month-long decline in the price.
Yes… there was some choppy action in January, when it looked like coffee could be ready to rally. But, the price couldn’t hold above its 20-day EMA for more than a day or two. And the decline resumed.
Now, though, the chart looks quite similar to the pattern that formed the low last September. The price of coffee has been falling for several months. It has bounced off a multi-year low. And it just crossed above its 20-day EMA.
I’ll admit… I was a bit early on that idea. Coffee wound up chopping around for another month before it really broke out. And, it took a few more pops above the 20-day EMA for the rally to stick. But, if you took my advice and only bought coffee when it made a sustained move above its 20-day EMA, you made a big gain.
However, I hope you took it off the table. Because coffee looks like it has a bit more work to do on the downside.
Take a look at this daily chart of coffee, plotted along with its 20-day EMA and various momentum indicators…
There’s quite a bit going on with this chart, so let’s walk through it one step at a time.
First, note the negative divergence on the RSI and CCI momentum indicators. When these indicators make lower highs, especially when the asset they’re tracking makes higher highs, it suggests a loss of momentum on that higher move – typically a bearish sign.
We aren’t getting that same divergence on the MACD. But, take a look at the black and red lines that make up the indicator.
Without getting too complicated, if the black MACD line is trading above the red line, that’s bullish. When the black line crosses below the red line, that’s bearish.
The MACD is about to show a “bearish cross” – where the black line crosses below the red line. That’s another warning sign of lower prices ahead.
The last thing I’d like to point out is the major support level on the chart – at the most recent low around $1.06. Coffee closed on Tuesday just slightly above that support line.
That puts it within spitting distance of its 20-day EMA. And, as I’ve covered, that’s an important short-term support/resistance level.
If coffee breaches that support line, it could fall all the way down to its next support at around $1.01 – well past the 20-day EMA. There’s always the chance it bounces off that support. But, given the negative divergence on the momentum indicators, and the imminent “bearish cross” on the MACD, I think it’s more likely that coffee falls further.
If you’re still hanging onto the coffee trade I mentioned in April, you might want to take your gains off the table.
Best regards and good trading,
P.S. Yesterday I had a meeting with my video team, and they told me about a new feature we’ll be using in tomorrow’s Open Line Q&A…
Unlike our previous Q&As, I’ll be able to “share my screen” with you. So, for example, if you have a question about a certain sector or trading strategy, I’ll be able to show you an example in real time… using my own tools. (If you attended my Mastermind sessions earlier this year, this will be familiar.)
We’re only one day away from the Q&A, and I couldn’t be more excited. If you haven’t submitted your questions yet, do so here right now.
And be sure to tune in to the Q&A on this page, tomorrow at 2 p.m. ET sharp.
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