From the Desk of Ian Culley @IanCulley
We look at a lot of charts. And believe it or not, many of them are absolute messes. Sideways, choppy, and trendless describe most markets right now.
It’s just a fact.
But we always find those big bases and tight continuation patterns on the verge of breaking out that keep us turning on our computers every morning. And the market I want to share with you today has both!
Lets’ take a look at coffee.
Here’s a daily continuation chart of coffee futures:
This is the type of chart that captures our attention.
Coffee broke out of a multi-year base last spring, ripping to fresh 10-year highs. And for most of 2022, it has corrected within a downward sloping channel. These are characteristics of solid uptrends.
Remember, price doesn’t move in a straight line. Instead, it needs to digest gains after periods of expansion. Coffee futures have done just that, coiling in a continuation pattern at our risk level.
Now that demand has absorbed the overhead supply at this key extension level, the path of least resistance points higher once again.
But we’re not crazy about patterns with sloping boundaries, such as channels or symmetrical triangles. Breakouts from these formations tend to be unreliable and often lead to additional sideways chop.
The last thing we want to do is get chopped up, or endure the pain of holding a losing or trendless position and the opportunity cost that comes with it.
I still view the price action on the continuation chart as constructive. But I want to execute based on a horizontal boundary on the individual contract.
Here’s a chart of the December coffee contract KC22Z:
The bulls have been chipping away at supply for ten months, carving out a multi-month base. Our risk is well-defined at 243, a level that’s suppressed price since early November.
We want to buy a break above that level, targeting 274.50. To be clear, we can’t be long coffee on a daily close below 243. If it’s below this level, our bias is neutral.
What’s that you say? No futures account?
If you’re not into futures, there’s the iPath B Bloomberg Coffee ETN $JO:
I’m not the biggest fan of commodity ETFs and ETNs, but I like the JO chart. It looks similar to coffee futures and offers a well-defined level to measure our risk.
If and when it takes out a key extension level and its year-to-date highs around 72, we like it long toward 94.50. But we can only be long above those former highs from early in the year.
It’s simple. We like buying coffee on a breakout. And it can’t be a bad sign for commodities if coffee futures and JO are printing fresh highs.
Is the correction in commodities behind us?
It’s hard to say. One thing is clear, though, participation is broadening.
We recently pointed out cotton – and wheat futures and grains have also caught our attention.
If we’re above the pivot highs, we can add coffee to this growing list.
Thanks for reading.
As always, let us know what you think.
We love hearing from you!