Coffee Markets Looking to Find Base

Alan Penny

23 January 2020

3 min read

  • A crucial value which could attract value hunters
  • 200-day EMA in sight
  • 8% Fibonacci retracement

Coffee markets had sold off rather drastically over the last couple of months, but they now look as if they are possibly trying to form some type of base.

A base is a messy affair, but for those looking for a longer-term investment, coffee might end up being an excellent one as the market, at the very least, needs to see some type of bounce. We are at a crucial level that should attract a certain amount of value hunting.

Technical analysis for coffee

Coffee daily futures

Coffee is a huge market for the futures traders out there. As a result, it’s likely that the longer-term investor should be involved at current levels.

an opportunity for those who are willing to invest in soft commodities

The 110 level has previously been important on both sides of the trade, either buying or selling. The 200-day EMA is currently sitting just below there as well, and the market has formed a couple of hammers over the last few trading sessions.

Furthermore, the 61.8% Fibonacci retracement level is in the same area, so this looks like an opportunity for those who are willing to invest in soft commodities.

If the market were to break above the 115 level, it’s possible that coffee will go looking towards 120, followed very quickly by 125 in the future. The 200-day EMA will attract a lot of attention as it is a longer-term trend indicator, so it’s important to pay attention to. That being said, if the market was to break down below that level, coffee would probably drop down to 105, followed by the 100 level quite rapidly.

Nonetheless, the market has fallen so hard over the last couple of weeks that a certain amount of momentum would be difficult to sustain to the downside. It’s also worth noting that there is a significant push higher from the 106 level back in November, so it is probably only a matter of time before buyers return.

The future of this market

Trading is all about risk and reward. This is an excellent opportunity for a longer-term trend because the downside risk is somewhat limited. The market breaking down below the 200-day EMA technical indicator would be a major collapse in the markets, but on the other hand, we have a significant amount of reward just waiting to happen.

Ultimately, the market is due for a recovery. A certain amount of value hunting will more than likely come into play, as the commodity looks extraordinarily cheap and does tend to trend for quite some time.

The “golden ratio”, the 61.8% Fibonacci retracement level, attracts a lot of attention, and there are a lot of factors that should continue to make this market attractive. If the market can clear the 120 level, momentum will start to accelerate exponentially.

After this pullback, clearly there will be people looking to take advantage of setups in this general vicinity. Coffee tends to be very sensitive to weather in South America, so traders are also advised to keep that in mind.

Written By
Alan Penny

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