Coffee futures have been in a downward trend for quite a while, recently hitting fresh five-year lows.
This downward trend has been accelerated recently by a large growth in small speculative short positions. Small speculators typically come late to the party and are usually the ones left without a seat when the music stops. Their recent round of post Brazilian harvest selling comes near the seasonal trough in the December futures contract which, typically bottoms then rallies between the middle of October and its expiration in December.
WAITING ON FRESH DATA
The government shutdown has delayed the last two weeks of Commitment of Traders data. We do know that commercial traders have been net buyers in seven out of the preceding eight weeks while small speculators have been the largest collective sellers. This last round of selling by the small speculators appears to have been absorbed rather easily by the market.
Our proprietary momentum indicator is clearly registering a bullish divergence. Last week’s sell-off on Thursday and Friday leaves the market testing the five-year low it made on October 1, but still holding above the downward trend line dating back to May.
GOOD RISK/REWARD HERE
Given Friday’s exceptionally tight range of only .60 points along with the bullish divergence and the seasonal strength ahead of the market, we think the risk to reward scenario is good for a sharp move higher.
Breakout traders will look for the market to breach Friday’s high of 115.10 prior to entering long positions. New long positions, if initiated, should be protected with a sell stop at Friday’s low of 114.05. First resistance comes around 120. If all goes as planned, we’ll look for at least 125 to take profits.
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