Coffee is Still Percolating

05/28/2013 7:00 am EST

Focus: COMMODITIES

The coffee futures market has been in a steady decline in recent years, with the July contract falling to its lowest level since 2010, but Greg Harmon of Dragonfly Capital see technical signs of another bottom building and wonders whether it will confirm this time.

Coffee (JO) is one commodity that really needs to wake up. You would think that all of the caffeine would give it a big jolt after a two-year downtrend. Traders everywhere are watching for this to turn higher so a confirmed reversal could create a good-sized first move. But when will it come? There have been multiple potential reversal signals over the last year, and all have failed. Now, there is yet another one building. Could this be the one? Let’s take a look.

The daily chart below shows the most recent part of the trend lower. But over the last few months, a potential base is forming, with an ascending triangle. The relative strength index (RSI) and moving average convergence divergence indicator (MACD) continue to create higher highs and they trend up, but the RSI especially continues to pull back to the base. There is no certainty in a turnaround in this view.

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Moving out to the monthly view shows some promise, as well.

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The RSI is starting to level as it falls towards the technically oversold line at 30 and the MACD is improving on the histogram. Price is slowing its descent, as well, as it passes through the 61.8% Fibonacci level. The doji candlestick prints are happening on increasing volume. These all point to the potential for a reversal, but they have all been preset for over one year, as well. There is still no solid evidence that would lead to taking even a speculative long position at this point.

By Greg Harmon of Dragonfly Capital

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