The first half of 2021 will be dominated by commodities…at least, that is what we keep hearing from analysts and the media. I don’t really pay attention to all of that. What I do pay attention to are the charts. In this case, the chart of the Coffee future
COFFEE FUTURE
Coffee has been in a major downtrend since 2011, the reasons for this incredible drop in price are many and beyond the scope of this article. So, I will keep it to the chart only. The chart of Coffee futures has arguably formed a symmetrical triangle on the weekly chart. Now, if you are knowledgeable on the workings of classical charting principles, you probably already know that symmetrical triangles are neutral patterns, meaning they can break on either side of the pattern. In other words, coffee could very well continue its downtrend in 2021. Fundamentals actually support this narrative, with a global surplus of coffee and a potential bottom in the Brazilian Real which might cause coffee to slip further down.
The chart however paints a different picture, the price of coffee is currently sitting at the upper boundary of the symmetrical triangle which gives me a rather high conviction of an upside breakout. One of the reasons I’m leaning towards a breakout higher is the Relative Strength Index which is showing a major divergence. I’m not a fan of using the Relative Strength Index for short-term divergences, the signals are too frequent and unreliable. However, a divergence on a weekly chart is always something you should look out for.
The Brazilian Real might cause some problems for coffee though, a bottom in the Brazilian Real could limit future coffee sales from the biggest coffee exporter in the world. Below you can find the chart for the Brazilian Real/United States Dollar. You might see the incredible similarities with coffee right now. The chart of BRLUSD is on the verge of completing a symmetrical triangle on the weekly chart. Remember, symmetrical triangles are neutral patterns and can break on either side. If we can believe analysts, which is a very risky business…, we should see the Brazilian Real move back up.
