Coffee had a bad week last week in terms of price action. The frost scare caused a run up in prices and short term spec interest and this was followed by a rather brutal few days of selling when it was clear that the damage was minor.
Technicals are often backward looking so their ability to predict the future is limited, but trend-following strategies are prevalent in coffee and trend-following is backward looking by definition. This strategy is valid and popular (even profitable at times) but more importantly it is employed by specs in the market so it is important to keep tabs on it.
Here is the breakdown:
Price vs Moving Averages: the SMA 20 has been violated to the downside and is in bearish mode. The longer term SMA 200 still safely intact and not under threat doe another 15c.
Key support at 150 has been violated (though looks like it might recover today).
Studies: both the RSI and MACD have bearish crosses and are in sell mode. Highs and lows in these indicators are confirming the bearish trend.
Patterns: We have what looks like a bearish Head and Shoulders top. This has a target of 135 in U, and if that is reached it will put us dangerously close to the 200 day SMA.
Conclusion:
A bunch of bearish technicals doesn't necessarily mean that we are in for a dramatic sell off. In fact, sometimes it means that we are about to have a bullish reversal. Things often looks worst just before they turn around. That said, these are pretty solid indication of recent sentiment, and that sentiment is clearly stating that the market has been overvalued.
Looking forward, we have the FOMC minutes this afternoon. This will provide some insight on what to expect from the dollar, and that will provide a new catalyst to test the markets direction.