Tops and Bottoms are difficult to find. This is especially the case when trying to find a turn in a strong trending asset. We did our best last Spring to try and time the bottom in Natural Gas, specifically relative to Crude Oil. It wasn’t easy, and the entry points were tricky, but NatGas ultimately bottomed in April, doubling in price before the end of the year. The Crude Oil/NatGas Ratio dropped by 60%, and that crash doesn’t appear to be over.
These are the sort of results we look for when trying to time a turn like this. Today, we are seeing similar opportunities in Coffee Futures. Here are my top 5 reasons why the bottoming process in Coffee has begun:
1) Sentiment – The right people hate it. Take a look below at the Commitment of Traders Report from the CFTC. The green line represents the Commercials Hedgers, or “smart money”, buying relentlessly while the Speculators in Blue and Red have been selling for several years. Last time we had a combination like this (brown circle), Coffee futures tripled shortly thereafter:
2) Former Resistance Turns Into Support – We are approaching an area in price where formerly there was a ton of supply. For 5 years, there were sellers between 120 and 150. Every time prices approached these levels, the sellers came in hard. But eventually, when those sellers dried up, Coffee exploded higher doubling its breakout price within a year. We know by looking at this chart that when the sellers were finished selling, the only ones left at that price were buyers. And here we are back to that same area:
3) Bullish Divergence in Momentum – With lower lows in price recently, the Relative Strength Index (RSI) has been making higher lows in multiple time frames. Here is a daily and then a weekly chart showing divergences in both:
4) Seasonality – this is historically a good time of the year for Coffee. Here are two seasonal charts, one showing more recent years, and a longer term chart going back 30 years:
5) Elliott Wave – It looks like a clear five-wave move to me. We typically see securities trend in impulse waves of 5 (like the Stock Market Crash of 08 – Fifth wave into March ’09) before reversing hard. Here is my simple Elliott Wave count:
And most importantly, I think the risk/reward is there. If we can enter with minimal risk and this much upside potential, what do we really have to lose? When picking bottoms, or tops (like AAPL for example), managing risk is priority #1. The price will do its thing and we can’t control that. So if the only thing that we can control is the risk, well then let’s focus on that. A rollover back into consolidations from the past 2 months and we need to be much more careful. A breakout above the November highs would be very constructive.
We’ll circle back on this one and follow up soon.
Tags: $KC_F $JO