Coffee Update: Moving Averages, Contrary Opinion and Price Targets!

By: Ray Tato | Tue, May 27, 2008
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With the price of coffee nearly flat for the year and trading below the neckline of the Monthly Head & Shoulders Bottom as shown in the MPT CHART, the upside price objective of 237.75 that I forecasted in my last report in February is currently on hold. As for the large Symmetrical Triangle objective of 160.00, you can see that this was decisively met with a price high of 171.60. And, if we combine these long term price targets into a single trading plan, the starting point for such an endeavor would be to take a closer look at the last four months of trading and mark them as I, II, III & IV.

Starting with Bar I we turn to Chart #1, notice how many bullish indicators we can find: narrowing volatility bands before a major price rise, a gap up in price above RTL1, a three line moving average crossover buy signal with a confirmation in trend with all three averages moving in concert. Combining this with a break above the long term bullish neckline in February gives the charts in all three times frames a very bullish stance, so much so, that one more layer of bullish sentiment has to be included.

Turning to the C&P Chart, notice the graph of coffee depicted from the January low to the February high includes a slew of bullish financial headlines. To a contrary opinion follower, these headlines can be quite timely, especially in markets like coffee. So, with the surge in prices of over 24% in one month, combined with the bullish press, would a trader think to 'take cover' or would he hold out for higher prices?

Moving on to Bar II, we take a look at Chart #2. After the bullish headlines and the raising of margin requirements were said, a series of technical indicators emerged to help reverse the trend of coffee, like: a widening of the volatility bands, a Key Reversal and an Inside Range day, a close below the 5 day MA, a crossover by the 5 day MA below the 10 & 20 day moving averages, plus a confirmation in trend with all three averages moving in the same direction. Question: Have we bottomed yet?

Well, to get a better understanding we turn to Chart #3 which covers Bar III. Notice the 5 wave pattern coming down from the (C) = Correction Wave Up Top?, this is bearish. Also notice, the price of coffee has been bumping up against overhead resistance for weeks. On the other hand, a small triangle is currently at play as a reversal pattern in the short term which could eventually lead to more gains. Question: Has the 5th wave started or have we bottomed in the short & intermediate term?

Starting with the short term we take a look at the current July Contract in Chart #4. This chart shows price is trading flat within the confines of a channel. Also notice the last two daily bars have turned bearish and that one is capped with a KR. Further, notice the price of coffee is moving lower and is now below all three moving averages. And,with this type of action, the lower boundary line of STL1 looks like it is going to be tested soon again. And if this line should give in, this will leave no doubt that wave 5 has started. Right? Maybe.

Returning back to the Intermediate term, we take a look at the Cycle Chart. Notice the 10 Week cycle might have bottomed in March, also notice that each time the price of coffee came down to make a cycle low, the momentum indicator diverged with price and produced an intermediate run to the upside. But, in this case a divergence to price has not appeared, and this begs a Classical Bar Chartist to ask: Did coffee make a bottom in March or might we wait a few more weeks for the divergence factor to kick in? Well, that answer will have to wait for the next report. We will see!



Author: Ray Tato

Ray Tato

Disclaimer: Ray Tato or the Apprentice Technicians Outlook will take no responsibility for the accuracy of these source charts for price and time comparisons. They are the representations of an outside agency. I did not create the original content, supply the data needed or generate the original source charts for public viewing. I only try to convey what I see as a technical analyst. Nowhere in this abstract is there any indication to trade or invest. This piece is for educational as well as theoretical practice only. This is an exercise, and can in no way be viewed as a reason to put ones capital at risk. I do not advise you to trade based on this report.

Bio: Ray is an independent analyst and investor who began his education in the financial markets in 1985 by working on the floor of the Chicago Board of Trade. In 1999 Ray began his Technical Analysis studies at the Chicago Mercantile Exchange where he became a classical bar chartist. Along with charting, Ray like to study cycles and wave theory and mostly follows the DJIA. In his spare time, Ray plays blues on the harmonica. Ray lives in Chicago.

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