ICE Coffee Bulls Retreat From New 2014 High -- Technical Analysis

Kira Brecht

  ICE December coffee futures are slightly weaker Wednesday, as the market retreats from the fresh

2014 high scored on October 6. An explosive move higher in late September and early October saw the

coffee market hit overextended and overbought technical readings, which leave the market vulnerable

to a period of correction and consolidation.

ICE December coffee recently traded down 25 points at $2.1610.

  The past several weeks have seen the coffee bulls seize control of the market. After basing out at

the $1.7640 level in late September, the December contract climbed quickly higher, touching a new

2014 high at $2.2550 on October 6.

  The market pierced the late April price peak at $2.2260 intraday on the latest price run-up.

However, the coffee market registered overextended technical readings, trading above the upper daily

Bollinger Band line for the previous four sessions. Markets rarely can stay above the upper line for

long, before a reversion-to-the-mean type of reaction sets in, which is occurring now in the coffee

market. Additionally, the 14-day relative strength index hit overbought levels at 72% on October 6,

and has now slipped lower below the overbought line at 70%.

  This simply shows that the coffee bulls propelled the market sharply higher in recent weeks and

bullish fatigue is setting in. The bulls have run out of steam and the coffee market is vulnerable

to a period of consolidation or correction, as the market tests resistance from the April high at

$2.2260. The December coffee contract did not close above that level on the run-up.

  Near term resistance is now seen at $2.2260-2.2550, and that is the level the bulls need to scale

to open the door to a fresh up wave in coffee market action. However, for now, that level could hold

firm as the coffee market may need to pause to digest the recent price run-up.

  Overall, the moving average outlook is bullish for December coffee. The contract is trading above

its 10-day, 20-day, 40-day, 100-day and 200-day moving averages, which is a bullish position for the

trend following crowd.

  A look at the monthly continuation chart for ICE coffee also shows a bullish upside breakout

developing in October. But a monthly continuation contract close in October above the $2.1570 zone

(the April 2014 monthly continuation high) is needed to confirm that breakout.

  Bottom line? Price action is bullish. But the coffee market ran up quickly in recent weeks and

became overextended and overbought. Near term support lies at $2.0540 for December futures. As long

as that floor holds firm, the technical trend outlook is sideways to higher and the bulls may just

be biding their time before another attack on the upside is seen.