Is it Time For a Cup of Coffee?

Coffee has been getting killed over the last couple of years, down over 50% from its peak in May ’11. There have been a few short-term bounces but the long-term trend is without a doubt down. However, there appears to be some interesting things happening in the iPath Coffee ETN ($JO).

With the below chart of $JO I’ve drawn the down trend channel that coffee has been in since July 2011. I did not start my resistance trend line at the peak in May, if I had it would (in my opinion) have been too broad and $JO would likely have to rally in the double digits in order to meet resistance. For support you’ll notice I didn’t simply connect all of the lows. Instead I’ve drawn a support trend line that connects with multiple price points over the last nearly two years. This trend line seems to be where price ‘reacts’ and finds support. It’s okay that it’s not neat and pretty and ignores the June 2012 low – price action isn’t always going to line up perfectly. It’s our job to recognize that.

We can see that price put in a short-term double bottom and then cleared its 50-day moving average. With the double bottom we can see that the Relative Strength Index has put in a positive divergence. On the initial drop momentum became oversold and then put in a higher low as price retreated. While the RSI indicator has been rising it has now found resistance at the fall trend line that started the last time we saw an overbought momentum reading. Bulls need to get momentum above resistance and above 60 in order to have a fighting chance of getting $JO to continue an advance.

CoffeeI’m by no means calling for a bottom in the coffee market. This small bout of bullishness is not enough to overshadow the multi-year destruction that’s taken place. However, price could be shifting. Luckily we have tools at our disposal to monitor what takes place in the coffee market. I’ll be watching to see if price can make it back to its falling trend line or if the bears claw at momentum and in turn send the price of the caffeine-filled bean lower.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.
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  • ShortBusTrader

    JO is a derivative of the underlying Coffee contract, which is not a continuous contract, it requires rolling several times a year. Each time it rolls there is an added error in the JO ETF of tracking the real coffee prices. Any price movements in JO have no effect at all on the underlying coffee prices as the underlying coffee contract is many times larger than the entire market cap of the JO ETFcontract, and any patterns seen in the JO ETF will have NO effect on the coffee contracts. Then to use a derivative of a derivative that has an indirect relationship to the underlying prices (RSI is a derivative of the price of JO, which is a derivative of the prices plus contract roll errors of coffee prices), you are using a false and very erroneous indicator.

    Given that the JO ETF has built-in error due to the rolling of the underlying contracts and ETF has built-in management fees and the price action in JO has no effect on the price of coffee, and any support/resistence in JO has no relationship to coffee prices at all.
    DON’T YOU THINK IT IS NONSENSICAL to be doing any long term technical analysis on JO ?

    Just in case you think the answer to my question is NO, i will give you the correct answer. YES, it is NONSENSICAL. Your channel analysis is worthless.

    • athrasher

      Thanks for the comment. My analysis is looking at the short-term move. As I stated, I’m not calling a bottom in coffee prices but bringing attention to the short-term momentum divergence that’s taking place which is not as affected by the monthly roll that takes place in the ETN. You are correct in that JO is not a perfect ETN and I agree, it does have tracking error. But for a short-term view it is adequate. You may be right about the trend lines that cover a longer period of time, I didn’t take the tracking error into consideration, thanks for pointing that out.

      • ShortBusTrader

        Thanks for responding politely and professionally to my somewhat rudely worded comment.

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