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Navigating Coffee Bear “Down Here ” a Matter of Scale

Posted 04/04/2019 7:45AM CT | RJO Market Insights

Tue’s 91.25 low was the lowest price the coffee market has seen since July 2006 and a new low for the secular 8-YEAR bear market from May’11’s 308.90 high shown in the quarterly log chart below.  This secular bear has come within a smidge of the (89.34) 61.8% retrace of 2001 – 2011’s 41.50 – 308.90 bull but is no more pertinent than the 73.69 level derived from the 1.000 progression of 2011-13’s 308.90 – 100.95 decline from Oct’14’s 225.50 high without an accompanying bullish divergence in momentum needed to break the major downtrend.

 

A key takeaway from this historical perspective is the chasm between Nov’13’s 100.95 low and 201’s 41.50 low that is totally devoid of any technical levels of merit.  The only levels that exist below 100.95 are “derived” from prior data points like Bollinger Bands, imokus, etc., and even the vaunted Fibonacci relationships we cite often in our analysis.  And such derived levels NEVER have proven to be reliable reasons for support (or resistance) in the absence of a trend-stemming bullish (in this case) divergence in momentum.  And they never will.  This doesn’t mean we’re forecasting a collapse to 2001 levels around 41.50.  But it certainly does mean that until and unless this market recoups a prior corrective high of a scale sufficient to break the major downtrend, the market’s downside potential is indeterminable and potentially severe.

Coffee Quarterly Chart

Coffee Monthly Chart

The monthly log chart above shows the market recently trading below the past 10 YEARS’ support from the approximate 100.00-area that’s now got to first be approached as a huge resistance candidate heading forward.  More specifically, on a weekly basis below, former 95.10-to-98.60-range support from Sep-Dec’18, since broken last month, is considered new near-term resistance that we’d expect to contain bear market correction attempts.  On this scale a recovery above 25-Jan’s 107.15 larger-degree corrective high and key risk parameter remains required to break the downtrend from even 19Oct18’s 125.50 high, let alone the secular bear market.

 

This isn’t to say the market is totally devoid of any promising or hopeful bullish technical elements.  This weekly chart also shows understandably historically bearish sentiment levels typical of major base/reversal environments and the prospect for an “outside week up” (higher high, lower low and higher close than last week’s range and close) that often times is a subset of a broader base/reversal process.

Coffee Weekly Chart

Coffee Daily Chart

Drilling further down, today’s recovery above 27-Mar’s 96.40 minor corrective high confirms a bullish divergence in daily momentum (above).  This mo failure defines Tue’s 91.25 low as one of developing importance and a tight but objective risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed.  This said, this mo failure is of too small a scale to conclude anything more than another interim corrective hiccup of Jan-Apr’s 107.15 – 91.25-portion of the secular bear.  The 38.2% and 50% retraces of this decline cut across at 97.02 and 98.88, respectively, and correlate well with former 95.10-to-98.60-area support-turned-resistance.

IF, alternatively, the past couple days’ recovery is the start of something bigger to the bull side, we would expect proof of trendy, impulsive strength above the 100.00-area and then, even more importantly, proof of 3-wave, corrective behavior on a subsequent relapse attempt to satisfy our three reversal requirements before a broader base/reversal threat can be more objectively considered.  Until such requirements are satisfied, traders are advised to first approach this recovery as another bear market corrective selling opportunity with a countering bearish divergence in short-term mo from the 97-to-99-range stemming the recovery and rejecting/defining a specific high and new short-term risk parameter from which a resumed bearsh policy can be objectively rebased and managed.

In sum, a bearish policy remains advised for long-term players with a recovery above 107.15 still required to negate this call and warrant its cover.  Shorter-term traders with tighter risk profiles are advised to move to a neutral/sideline position to circumvent the heights unknown of a correction or reversal higher.  We will be watchful for a countering bearish divergence in short-term mo from the 97-to-99-range to recommend resetting a bearish policy.

Coffee Jun '19 240 Min Chart

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