Coffee Bulls Test 40-Day Moving Average — Technical Analysis

By Kira Brecht 

ICE March coffee futures jumped higher Wednesday, following Tuesday’s strong gains. The market has been consolidating in a corrective phase in recent weeks, but now the bulls are testing key 40-day moving average resistance at 1.0980 a pound. The bulls are trying to gain a foothold after the massive bear market and action around the 40-day moving average will be critical to monitor near term.

ICE March coffee recently traded up 45 points to 1.1070 a pound.

Taking a look at the big picture for ICE coffee, the monthly continuation chart reveals a long-term bear market. Since the May 2011 high, ICE coffee futures have tumbled 67% into the November 2013 low.

Since hitting a new contract low at $1.0415 on Nov. 6, ICE March coffee futures have stabilized and traded sideways to higher, capped by resistance at the Dec. 4 high of $1.1290. A bearish reversal day emerged on Dec. 4, which knocked prices lower to the $1.0565 zone, but the bulls are fighting back with a push higher this week.

In recent months, the market has shown a steady downtrend on the daily chart. The 40-day moving average has largely limited the upside for the ICE March coffee market in recent months. While the contract has pierced it intraday or for a few days, there have been no substantial or long-lasting upside corrections above that area. Given the market’s recent history with that moving average it will be important to monitor near term. Sustained gains above the 40-day moving average would give the bulls strength to retest the Dec. 4 high at $1.1290, which is important chart resistance.

Paul Hare, executive vice president at the Linn Group, pointed to the November contract low and said "it’s too early to say if it is a significant bottom. But, it has slowed the bear move." However, Mr. Hare added that "this could be the beginning of a low. Generally these markets develop a range when they bottom out."

For now, Mr. Hare saw ICE March coffee as trading in a range between roughly $1.0500 and $1.1200/1.1300. He pointed to the 40-day moving average as an important zone near term. "A sustained rally above the 40-day would put the market in a position for additional corrective rally."

In order to see a strong bullish signal, however, Mr. Hare concluded that a close would be needed above the $1.1200/1.1300 zone. Until then, he advised traders "to play the range."