Technical Special: ICE Coffee Bounces On Oversold Conditions

Technical Special: ICE Coffee Bounces On Oversold Conditions  DJ
  ICE December coffee futures bounced modestly higher in early Wednesday morning action. However, for now, any gains should merely be viewed as corrective to the overall technical downtrend seen on the daily chart. Coffee futures are over sold in the wake of the latest selling action, which leaves the market vulnerable to modest short-term gains.   ICE December coffee recently traded up 110 points at $2.2765 a pound.   Since the beginning of September, the bearish forces have been in firm control of the near-term technical trend. ICE December coffee has slid from$2.9085 a pound on Sept. 1 to the Oct. 3 low at $2.1980.   As the market hit the early-October lows, the nine-period relative strength index (RSI), a widely watched momentum indicator, had fallen to deeply oversoldlevels under the 30% mark. On Sept. 23, the RSI hit 14%, but climbed to 20% on Oct. 3 as price hit a new selloff low. Technical traders call that a bullish divergence, when price hits a new low but the momentum tool climbs. It suggests the market is overdone on the downside, at least for the short term, and vulnerable to a corrective rally to alleviate the oversold conditions.   Dave Toth, director of technical research at R.J. O'Brien, said the market was approaching a test of key short-term resistance. He pointed to the $2.3360high from Sept. 30 as key to watch. "If the market can recover about that levelit could have bullish implications," he said.   Overall, Toth saw the potential that the Oct. 3 low was the end of afive-wave Elliott decline from the Sept. 1 high. Elliott moves conclude withfive waves. Also, Toth noted that the Oct. 3 low "is just one figure away from38.2% of the entire 2010-2011 rally on a log scale."   Toth said that all adds up to a "good "risk/reward possibility for the restof the year" in the coffee market. He saw gains through $2.3360, if they wereto occur short-term as a signal to "pare or neutralize bearish exposure" to thecoffee market and also a signal to "start building cautious bullish positions."Toth identified the $2.1980 low as a place for a stop-loss. "The $2.1980 low is the only technical level of any pertinence below the market," he explained.   However, the burden is on the bulls currently to rally through $2.3360 and then $2.4655, the Sept. 27 high, to confirm that bullish action is anything other than just corrective.