Back in January, I wrote about the price of coffee and how it could very well move higher due to the formation of a symmetrical triangle. Fundamentals indicated that the downtrend for coffee was likely to continue but the chart showed us a different view, which piqued my interest.
COFFEE FUTURE
The symmetrical triangle broke out of the upper boundary at the end of February but it quickly reversed and traded back towards the 50SMA where it found support. These hard retests certainly test your patience but with the right trade management these types of retests can be just a minor inconvenience for most traders. Now, our initial target of 170 dollars was very easily taken out back in mid-July. Coffee moved towards 220 but reversed rather quickly.
Now, the question remains if coffee can continue this uptrend. Given the aggressiveness of the advance I’m more inclined to believe we will be seeing a decently sized pullback in coffee. If we take a look at the COT data for coffee futures we see that, historically, the large specs are always overly long during the formation of market tops. On the opposite side, we see commercials being short most often during these advances. Now, the value of COT data comes from analyzing the data over a longer period of time. It is rather pointless to look at COT data in isolation, the value comes from knowing how extreme commercials or speculators are net long or net short relative to the past. Currently, the large specs (represented by the green line) are at record long positions and commercials (represented by the red line) are at their record short positions seen over a period of more than 30 years!! Of course, a market will not always resolve in the direction of the commercial short COT profile. But, usually commercial interests are frequently on the right side of the market.
In my opinion, Coffee needs to keep above the 50SMA for the uptrend to continue. The most ideal scenario would be the formation of a continuation pattern with a clear breakout which at that point would most likely signal a continuation of the uptrend in coffee. But, the COT profile does not agree with a continuation of the uptrend, at least for now. Now, you shouldn't go short coffee due to the COT profile either. Remember markets can remain irrational for longer than you can remain solvent and commercials can be wrong too!