A Coffee Trend Any Trader Can Play

01/06/2012 9:52 am EST

Focus: FUTURES

Coffee futures are trending steadily lower on the shorter time frames, creating a fine short opportunity not just for futures traders, but also by way of a primary coffee ETF that has tracked the trend almost perfectly.

If you look at a daily chart of coffee futures, the long downtrend is the first thing you see. If you are an investor, then maybe you have the java blues.

Look at the chart below.

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Nothing in this chart is bullish. The Relative Strength Index (RSI) has failed to break back above even the mid-line and every time the Moving Average Convergence Divergence (MACD) indicator goes positive, it flattens quickly.

See related: Demystifying the MACD Indicator

This looks like a set-up for a great short back to the trend line support. Now, before you start down the path of “I don’t trade futures, though,” look at the correlation between the futures and the iPath DJ-UBS Coffee Subindex Total Return ETN (JO) below. The brown area is the JO price.

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Fits about as tight as the glove in the OJ Simpson trial!

Longer-Term Charts Tell a Different Story

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Now, stay focused, but zoom out a bit to the weekly chart and things start to look a little bit different. Perhaps an extended bear flag; or maybe continued downside. The RSI is certainly trending lower, but on decreasing volume with a MACD that is improving.

Those shorter simple moving averages (SMAs) are turning lower, though.

chart
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Let’s zoom out even further to the monthly chart. This is a totally different story.

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A long, ten-year uptrend with the price just pulling back to the mid-line of that channel. There is plenty of room lower before this will turn bearish on the monthly scale.

Also on the support of the 20-month SMA, which has been a helping hand higher. This suggests that maybe the year-long downtrend may be over. It will take a couple of months before we know for sure, and it will leave plenty of opportunity to short it to the bottom of the channel if it is not done.

But until it is more clear, put on a pot of coffee and sit back and watch.

See also: A Trade Idea So Good You Can Taste It

By Greg Harmon of Dragonfly Capital.

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