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Flags and Pennants in Coffee Point Higher

With #technicalanalysis for #commoditymarkets, the key is to ask yourself is there a logical, #psychological phenomenon ?


With #coffee this week we are seeing two classic examples of "continuation patterns". #Continuationpatterns are typically a consolidation before the #trend continues in the same direction.


The logic and psychology behind #consolidation is pretty straightforward. Whenever there is a big move in one direction (the #trend), the appetite for buying or selling dries up as participants take the positions that they wanted. At this point (when buying/selling dries up), the #market has already repriced in the direction of the trend, and now is when the skeptics move in. It is the role of the skeptics and #contrarians to say that the market is mispriced. If they are right, the market makes a reversal. If they are wrong (or not very confident), then the market just consolidates a bit before the trend resumes.


This consolidation often takes similar forms: a small triangle (#pennant) or a slanted rectangle (#flag). But the meaning of the price action is similar, the markets is converging on an agreed upon price.


In the coffee markets last week, the move was rapidly higher over the course of 2 days. Since then the market has been testing the bearish hypothesis and it has not proven very strong. In other words, the market is accepting this higher price.


Traditionally, we look for a break higher (above the old high) to confirm that the trend is intact. If we fail to break that high, then this will look like a failed secondary peak and signal a reversal.



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