Coffee has been trading in a downtrend for the last 14 months. In this post, I will be going over why I think coffee might be bottoming and why it might be time to add a cup of coffee to your portfolio.
Coffee has been trading in a major downtrend after a failed breakout attempt in 2016. As you can see in the weekly chart below, coffee formed a massive consolidation pattern that lasted for two years. Ironically, this consolidation pattern was shaped like a cup and started in 2015 and ended in November of 2016 after a failed breakout attempt. In fact, this consolidation pattern caught the attention of many commodity traders and many professionals were calling for higher prices thinking that this consolidation pattern could potentially be a cup and handle. However, Bloomberg Coffee ETN or $JO which, closely tracks the coffee futures has been trading in a major downtrend after reaching a high of $26.21 in November of 2016. Shares of $JO have lost a staggering 42% since November of 2016 and now are trading at $15.54/share.
This downtrend has caused most traders to lose their interest in adding coffee to their portfolios but this is typically the time that you should be paying close attention to coffee as a longer term play. In addition, momentum indicators are finally turning up and bullish divergences can be seen in the Slow Stochastic, RSI and MFI. Bullish divergences in these momentum indicators don't always mean higher prices. However, divergences in the weekly time-frame are extremely powerful and must not be overlooked.
Although there are some major signs of a price bottom on the weekly chart, coffee prices can still consolidate for months and further analysis in the longer term charts such as the monthly chart is needed.
As you can see in the monthly chart below, coffee has been trading in a primary downtrend since 2011 and $JO can still test the $20-$22 area which coincides with the trend-line shown and still remain in this major downtrend. In addition, the MFI is showing extreme oversold conditions on the monthly chart and the Slow Stochastic is finally turning up. Should you decide to catch this bottom and buy $JO, I'd suggest to place a stop-loss below $14.60 level just in case coffee starts trading lower and this major downtrend resumes action.
