Coffee Update: A Bullish Scenario Turns Bearish?

By: Ray Tato | Sun, Jul 1, 2007
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With the direction of coffee prices being confirmed to the upside by the breakout through the downward price channel in mid May as shown in Chart #1, the small Head & Shoulders Bottom I mentioned in the May 22nd Report easily met its objective, so much so, that a series of possible Head & Shoulders Bottoming patterns has emerged with an upside price objective 124.00.

If you would turn to Chart #2, notice I have labeled each H&S Reversal Pattern as either being a pattern that has met its objective, is in the process of potentially meeting its objective or is only a potential five-point reversal pattern, at best. Also, all appropriate necklines of each pattern are marked as #1, #2, and #3.

Looking further with Chart #3, notice the contract high per the July Futures is 118.40, and since then, coffee has pulled back or weakened to the point that any would be bulls, probably have either moved to the sidelines or are in the process of doing so, why? Well, notice the converging trend-lines that form a Symmetrical Triangle is located at the top of Chart #3. Also notice, that this former potential continuation pattern has since suffered a price break of the lower boundary line, thereby working as a reversal pattern, which now forecasts a lower price objective of 107.95 for the July futures.

OK,...then what about the September price Chart, how do the two charts compare? Well, first of all, the September contract shown in Chart #4, does not have a downside objective to meet; but, with the weakness so far implied by breaking below necklines and an up-sloping trend-line, the chances of the H&S Bottom shown here of reaching its target of 126.00 is in serious trouble. How much trouble?

Well, looking even further with Chart #EW, you will notice that all three major Fibonacci retracement ratios of 38, 50 and 62% have not held up, and the only major ratio left is 78% at 109.57. If this level should give way, a full 100% give-back is possible and the whole H&S Bottoming set-up would fail, ouch!

With that said, I want to introduce Chart #NMC, this is a Continuous Daily chart for the intermediate price of coffee which could add an additional level of insight into the Classical Bar Charting condition in the short & intermediate term trends. How?

Well, first of all, when you combine the weakness and downside objective conveyed in the July Futures chart with the A-B-C? correction for September, and consider that all three major Fib. Ratios have been taken out to the downside, the chart shown here with its potential for a Head & Shoulders top only builds on the above mentioned propositions.

And, if the Long Term Support lines featured on this continuous chart are met, tested and supported, the implications of what could follow based on the Weekly and Monthly charts to be shown in subsequent reports, could be quite bullish. 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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