Coffee Bearish Amidst Lower Rainfall In Brazil

February 20, 2015

I questioned in my previous analysis on Coffee in November last year whether the price of coffee can move into new highs and pointed out that there was room for short term long trades from the levels the market was trading at the time. The short term bull moves happened pretty much according to my analysis and the targets were hit as expected and the market was not able to stage another rally into new highs. When a market can’t move higher it is likely to move lower, especially after such a big rally in 2014.

According to Bloomberg news in January it was expected that the rainfall in January and February might not be enough for the coffee crops that are in a delicate blossom phase and could be damaged. This was bullish for coffee but the market participants did not see it that way and the technical picture has since then deteriorated. The rain in February has been below average in key regions in Brazil but as we can see the price keeps on breaking support levels and heading south. This is yet another case where the price action and price reactions to news are more relevant in understanding the market than the fundamental news itself.

The price of coffee has now broken below a support after it formed a huge top above 159.40. This break is happening with decisively higher participation (volume) which suggests that the move below the support is significant. This former support is now a resistance while there is some support at 144.92, a level that has had a varying role in the past (sometimes support and sometimes a resistance). A Fibonacci extension level coincides approximately with this level suggesting that it could act as a target one for short positions. In addition the 61.8% Fibonacci retracement level (drawn from the 2013 low to 2014 high) at 148.80 being in the general area of the level adds to its significance. I have left the retracement levels off the chart for better readability.

Now that the price has broken a neckline in a huge top formation we obviously would be interested in knowing how much lower the current move could take us. Should the width of the top give any clues then the low would eventually be just above 93 dollars, a price level not seen since 2005. This would be a very sizeable move but as we have seen this market is capable of creating huge moves. We have seen excessive moves in the past: 87% from 1997 top to 2001 low and 67% from 2011 high to 2013 low.

In the daily chart we have a downward channel with a bottom coinciding with the 144.90 level further increasing the technical significance of the level. Should the market retrace back to the resistance level just below 160 dollars this would give an opportunity to join this downside move and the region 144.90 would then be a reasonable target level for the trade.

The four hour chart gives us some potential intraday reference points with the nearest resistance levels being at 155.28 and 156.36. The latter level coincides with the 23.6% Fibonacci level. These levels create a potential zone for short entries but they should be used only if the lower time frame price action confirms their validity . If market is weak or in other words strongly bearish, it will turn lower from these levels. Should there be a fast move higher and through this zone, then the zone between 157.60 and 159.40 becomes important and a very potential level to look for short trades.

Conclusion:
The rain in February has been below average in key regions in Brazil but as we can see the price keeps on breaking support levels and heading south. This is yet another case where the price action and price reactions to news are more relevant in understanding the market than the fundamental news itself. The price of Coffee is trading below an important level that used to support price and is now a resistance. The move last year was excessive to the upside, therefore the move lower can be very sizeable as well. I look for short signals in lower time frames at the level identified in the above charts. My Target I is at 145 and Target II at 125 dollars.

Join me on Live Analysis Webinar on Tuesday 24th February at 12:30 pm GMT. Register HERE https://www.hotforex.com/en/trading-tools/trading-webinars.html and as usual it is better to log in early to get your seat!

Janne Muta
Chief Market Analyst
HotForex

Publication source
HotForex information  HotForex reviews

January 20, 2017
The dollar has settled moderately lower
Asian stock markets were mixed overnight, after U.S. and European shares closed in the red Thursday. Japan and mainland China bourses managed to move higher (Chinese GDP beat expectations at 6.8%)...
January 20, 2017
A huge disappointment in the UK data
UK retail sales fell most since 2012. We see he fastest pace of decline in almost five years in December. It is due to sales of... pretty much everything from household goods to clothing and food...
January 20, 2017
Trump takes office today. Markets await inauguration speech
Investors await Trump's inauguration and speech due later today as he takes office as the 45th President of the United States. The U.S. dollar was seen giving up some of the gains yesterday with some volatility coming off the EURUSD on the back of the ECB meeting...

Orbex Rating
Fort Financial Services Rating
FIBO Group Rating
Vantage FX Rating
OANDA Rating
HotForex Rating

TopOption Rating
Empire Option Rating
GTOptions Rating
OptionTrade Rating
Beeoptions Rating
Dragon Options Rating