Technicals Suggest Coffee Bull Market is Over

Despite low certified inventory levels and a persistent inversion, the #coffeemarket has maintained a bearish trend and now even broken key support of the downtrend. From a chart's perspective, the bull market is over.

The 200c level, a 1-year support reference, is long gone now. KC is currently in the 180c, which is a 14-month low. To be clear, this is the weakest chart coffee has printed since it has established itself above the 200c range a year ago.

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While the dramatic increase in open interest in short positions suggests that short covering rally potential is strong, the technicals are nearly unanimous in their view bearishness. While we at CTA are fundamentalists, a large portion of speculators are trend-followers. Specs are still currently net long as of the last COT, and if they flip to net short there is huge bearish potential.

In this article, I will present the current overview of the coffee market from a technical perspective. We will look at how prices have been progressing, what are the signs that indicate a potential end of the bull market, and which are those that still indicate some upwards potential.

The Breakout

The market was extremely bullish from 120 up 260 and from that peak, it has been “consolidating.” In other words, the market has stayed high and not decisively broken lower, but has been drifting lower over time.

This downtrend did not indicate the #coffee bull market was over, as the long-term chart was ambiguous on this point: the market could be starting to reverse, but it could also only be consolidating before a longer leg, essentially a bullish flag pattern.

With declining certs, strong differentials and an inverted structure the bull market was questioned very little ... until now. The recent breakout of the lower range of the 9-month trend, as well as the consecutive breakouts of important psychological supports have put the bull market's legitimacy in check.

What could have been interpreted as a sideways trend, between 210c and 230c, with few quick breakouts outside this range over several months has now changed. In mid-October, #KC broke below the 210c range, and has been "freefalling" ever since, with a 2-week 28c loss.

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Current Situation

The most intriguing thing is that such abrupt movements are often followed by retracement rallies, especially if there are key supports (1Y and over) ahead. In prior sell offs, the lows have seen rapid recovery, so from a technical perspective we anticipated seeing the market rally out of these low areas quickly. However, the market clearly has other ideas.

Last week's COT revealed 10k new spec shorts and 12k longs liquidated from the spec position. This type of large movement in the spec positioning implies vulnerability and is often followed by a counter move. However, in this case an unusually weak #BRL stifled a rally attempt and has kept the market depressed.

While we still believe a retracement rally is likely, and potentially violent, at present the trend is undeniably negative.

A break below 170c would confirm a long-term bearish reversal, whereas KC needs to go above 205c in order to have a chance at making new highs. At this point, rallying 25c to 205 would be a mini-bull market in itself.

Projections

We have mentioned a few times the potential for another leg higher in the short-term. This is accentuated by the very weak technical studies (yes WEAK).

The technical signals are all negative. The MACD is bearish, and the RSI and Stochastics are negative and oversold. Both short and long-term moving averages (20 and 200-day) are well above prices and the cross is negative. However, there are 2 things that signal potential for a retracement rally.

1. Oversold indicators suggest that the market is overextended and will give a buy signal on any small rally.

2. The tendency of the market to revert to the mean.

While oversold indicators are not a buy signal in themselves, for reference, the oversold area of the RSI was always short lived during the previous 2 years. Over the last 28 months, the RSI moved below 30 only 2 times, and for only a day each. Now, we are currently at the 10th consecutive day of a <30 RSI.

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Once the market rallies out of the oversold area, this will turn into a strong buy signal that supports the odds for a short-term bullish reversal / upwards correction. Oftentimes, steep selloffs incite violent retracement bounces.

That said, nothing changes what has already happened: the market has already shown itself to be "comfortable" with levels that were not even considered for a long time. The bull trend is a rapidly fading memory.