Coffee looks ready to make a move…
In the September 14 Money Trends, I wrote about an exciting opportunity that could soon develop in the coffee futures market.
After some waiting, we are getting fairly close to a viable trade trigger today. Once it triggers, it should allow us to capitalize on the next big trending movement.
Let me explain…
In the chart below, I’ve labeled the recent trending and corrective phases. The trending phase is labeled 1 through 5, and the corrective phase is labeled A through C.
There is a nice time symmetry at the moment between these phases. That means the two phases have lasted around the same amount of time.
The trending phase took about 80 trading days to resolve. Meanwhile, the corrective phase has so far taken 84 days to resolve. This is assuming my hunch that the correction ended on November 4 is correct.
Let’s look at the chart below to see what I mean.
This time symmetry is important because markets tend to seek out equilibrium. But before I commit to the trade, I need more evidence…
I tend to take a more conservative approach with my trade entries, and this method has consistently worked for me over my years of trading.
So let’s break down some of the other evidence that tells me coffee is setting up for a new bull run…
When I look at a chart, the first thing I try to figure out is whether the market is trending or correcting.
If it is trending, I tend to sit back and wait for a corrective cycle to begin. I don’t like chasing a runaway train.
On the other hand, if the market is correcting, I try to identify what kind of corrective pattern is developing. That way I can get ready for a potential trade once the pattern resolves.
Before we get to that, though, we want to figure out what kind of correction we’re having.
You see, markets correct through both time and price.
For example, a market could have a very swift correction, which is what we see here with coffee. These swift corrections can retrace an appropriate percentage of the prior trend. We call that a price correction.
On the other hand, prices can meander sideways for a long time, retracing only a shallow percentage of the prior trend. We call that a time correction.
This may sound like boring trivia, but understanding the personality of the market you are trading is absolutely crucial.
So now you know we’re seeing a price correction in coffee. But what about the corrective pattern?
The pattern that is resolving in coffee right now is known as an ending diagonal.
Ending diagonals signal an imminent end to the current market cycle. That means that, once the ending diagonal completes, we should see a swift reversal in price action.
What I like about this ending diagonal in coffee is that it also happened to find support right on the Fibonacci support level of 78.6%, labeled on the chart.
Fibonacci support levels are important trading tools. They are great at indicating where a countertrend will end and the price action will go back to following its initial course.
But that’s not all the evidence I’m seeing. There is also a very sharp bullish divergence occurring in the momentum oscillator. What do I mean by that?
The momentum oscillator is the smaller chart you see below our main price chart. It measures how much the price has changed over a given period of time.
Meanwhile, a bullish divergence is a pattern in the oscillator that often marks the end of a downtrend.
The red arrow above shows the divergence. This divergence is marked by prices making new lows while the oscillator is rising.
While all this evidence is a great start, taking an entry right now would be a bit too aggressive for me. I would rather wait for the market to prove this bullish move has real legs.
If prices can break through the important resistance area (labeled on the chart) and establish a firm foothold above 114.70, that would be a sufficient trigger for me to go long this market.
At a minimum, I would expect prices to return to the September highs of around 135.
Editor, Money Trends
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