Navigating Possible Coffee Peak a Matter of Scale

September 23, 2016 3:18AM CDT

In Wed morning's Technical Webcast we cited former 153.90-area resistance-turned support as our short-term risk parameter to a still-advised bullish policy.  The hourly chart below shows that subsequent price action yesterday defined Wed afternoon's 156.00 low as a smaller-degree corrective low and short-term risk parameter the market needed to sustain gains above to maintain a more immediate bullish count.  It's failure to do so yesterday morning confirmed a bearish divergence that defined yesterday's 160.90 as one of developing importance and the END of the rally from 16-Sep's 147.40 low. In this regard that 160.90 high becomes our new short-term risk parameter from which any non-bullish decisions like long-covers and cautious bearish punts can now be objectively based by shorter-term traders with tighter risk profiles.

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From a longer-term perspective, clearly, yesterday and overnight's setback is of a scale insufficient to CONCLUDE yesterday's 160.90 high as a major peak.  Indeed, proof of commensurately larger-degree weakness below 16-Sep's next larger-degree corrective low and key risk parameter at 147.40 remains required to confirm a bearish divergence in momentum that would, in fact, break even the uptrend from 17-Aug's 137.85 low, let alone threaten this entire year's bull market. HOWEVER, there are a number of factors that warrant greater consideration of just such a broader peak/reversal threat, including:

  • waning upside momentum on both a daily (above) and weekly (below) log scale basis
  • the market's recent position relative to the (158.23) 50% retrace of 2014 - 2016's entire 225.50 - 111.05 decline
  • an arguably complete 5-wave Elliott sequence from Jan's 111.05 low
  • yesterday's "outside day" (higher high, lower low and lower close than Wed's range and close), and
  • the return to a historically frothy 82% reading in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.

If there's a more acute time and place for this market to peak out, we believe these factors suggest it is here and now.  Fortunately, the market has identified two technically key levels around which to navigate this peak/reversal threat: 160.90 and 147.40 . A recovery above 160.90 will mitigate this threat and reaffirm the bull that could still have significant gains left in it. A failure below 147.40 will confirm the reversal and expose potentially significant losses thereafter. Unfortunately, the market is currently trading in the middle of this range where the risk/reward merits of initiating directional decisions is poor.

These issues considered, shorter-term traders with tighter risk profiles have been advised to move to a neutral/sideline position as a result of yesterday's short-term mo failure.  The market's range-center status warrants a sideline position.  Longer-term players have been advised to pare bullish exposure to more conservative levels and are further advised to neutralize bullish exposure altogether on a failure below 147.40 or replace pared bullish exposure on resumed strength above 160.90.

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