Cup o' coffee anyone?

[Mercury]

So coffee looks like it is about to go into a bearish retrace (see my recent post for this set up).  My feeling was/is that a bearish retrace EWT1-2 is need to prime the pump for a big breakout.  Markets always seems to need a few attempts to make a significant trend changing breakout so at least 2 attempts could be considered a minimum here.  We may yet get a period of consolidation around the 11,500 in addition to a breakout but for now I am concerned with whether we will see that 1-2 retrace and how far it will drop as the eventual turn would offer a great Long opportunity.

The Fib 50% is always a favourite but there is also an unclosed gap just below this level so a close prior to a turn must also be considered as a very credible scenario.  However I am getting ahead of myself as the bearish retrace is not yet confirmed.  I do have the following technical support for it though:

1. A turn at a confluence of 2 weekly chart resistance trend lines
2. Overbought oscillators on the weekly and daily charts
3. NMD on the 1H chart
4. A gap break of a bullish channel on the 1H/4H charts
5. A credible 1-5 rally to the turn point, indicating an A-B-C bearish retrace next

Let's see if the breakout is confirmed but if it is my target for the retrace conclusion is around the 10,100-200 mark.

[Mercury]

And there it goes!  Let's see what happens next but that break to the bearish side is suggestive of a further retrace move, as projected.

[dmedin]

Interesting.  It seems as if you need to be in hourly mode (or less) to make wave counts because I can't make head or tail of it on daily charts.  I just redraw Fibs until they line up.

[Mercury]

Interesting issue @dmedin, and one I have struggled with myself.  I have a few personal insights for you, if care for them, as follows:

• Firstly I use multiple time frames for both analysis and as trading triggers, although I usually use the 1H chart as my main trading window, within the context of the bigger picture.
• With respect to EWT I never use it exclusively, and it is never an actual trigger for trading, merely an analytical corroboration.  In other words I need to have a credible EWT set up but don't use label positioning as a trading trigger; it is too rough a technique for that.
• With respect to Daily vs 1H, often I cannot see the internals on the daily chart (e.g. a wave 1 with an internal 1-5 pattern) but the wave labeling should sense in the context of the rest of the labeling on the daily.  In such cases I will then look to see if I can see the 1-5 internals on a shorter term time frame (4H/1H); occasional also 15 mins but below 1H things get less reliable for me.
• I will happily trade a price action move that conforms to my trading triggers even if the specific EWT at that point is not conclusive as I often see it in hindsight, however the contextual bigger picture EWT has to be present and credible for me to trade.

If we look at the Daily chart for Coffee (below). The May bottom at present looks like a trend ending turn (a large wave C - see my previous posts for why I think this is a C).  The rally up to wave 1 (purple) could be seen as either a 1-5 or an A-B-C, indeed my first thought was an A-B-C, which is what I was posting initially.  However the move down to wave 2 (purple) is a clearer A-B-C, which suggested the previous rally was a 1-5.  With another rally and retrace to follow (1-2 blue) and a strong straight rally to a new higher high vs 1 (blue), I can surmise that the current rally is part of a motive wave that will eventually breakout into a confirmed trend change and long term bull market.  I cannot see the internal 1-5 on the wave 1 (brown) rally until I look at the short term time frame charts.  However the wave 1 label is consistent with the rest of the daily chart labeling and I had a number of indicators suggesting a turn back down and I was anticipating a bearish retrace to set up a strong move to test the key 11,500 level.  So far this is playing out.

It must be noted that until we get a breakout and a higher high than the wave 1 (purple) point I cannot rule out a consolidation phase.  Indeed there are 2 unclosed gaps on the recent rally, one right at the beginning, which could mean the whole rally gets retraced to a new lower low.  If that happens then the wave 1 (brown) is negated.

Like a lot (all) of technical analysis the price action needs to confirm which scenarios are possible until there is only 1 left.  While I believe my Fundamentals case is strong for a long term bull market the technicals help to sort out the timing via the various scenarios in play.  Currently my lead scenario is for a retrace to wave 2 (brown) and then a rally to test the key resistance level.  However a deep rally might begin to change my mind.  The case for my lead scenario is strong, including the strength of the wave 1 (brown) rally.  It will take an equally strong bearish price action move to negate this.

[Mercury]

Coffee has keeled over as I had suspected it might.  Took a bit of consolidation time but after what looks like an A-B (light blue) retrace a Triangle consolidation price broke out to the downside and is now heading towards the price gap, around the Fib 62% area (10100 ish).  As there is another price gap right down at the beginning of the rally (9400 area) I cannot rule out a much deeper bearish move that could prove motive (i.e. head for lower lows big picture).

 

[Mercury]

Seems like a definitive turn back bearish has indeed taken place...

[Mercury]

Since my last post Coffee reversed on the Fib 38% and that was all the retrace we got.  After a break of the weekly chart resistance trend line I went Long again and then we got a fast push up through the gap to the next resistance level.  A break and retest of this is taking the form of a consolidation on the 1H chart at present.  A break through this to the upside is what I am looking for to confirm a long term bullish trend change. 

[dmedin]

@Mercury This is what I was trying to get at earlier.  Basic trend analysis seems to be far more useful than supposed wave counts.

[Mercury]

6 minutes ago, dmedin said:

Basic trend analysis seems to be far more useful than supposed wave counts.

Depends, as ever, on how, when and for what purpose you use it.  I got long Gold back in Oct 2018, what would trend analysis be telling you at that point?  There were plenty of trend followers telling me the trend was still down at the time...  I got Long Coffee in Oct this year, again the trend analysis was suggesting down.  EWT, among other things, helps me prepare for and be mindful of potential major turning points.  Once a trend change is confirmed and a major move under way then I tend to revert to trend following techniques as primary tools.  However EWT also helped me spot the Gold and Silver top recently and swing trade it so it is still useful within a trend, especially in the early period when large retraces are to be expected.  Any individual technique will be worst than useless if you follow it out the window to the exclusion of other things, especially where different techniques might be showing conflicting signals.

[dmedin]

Wow...

[Mercury]

Wow indeed @dmedin, this is what I have been getting at since I started this thread.  Initially I thought the market would drop into the historic bottom zone before breaking out but after the wave 2 (blue) bottom and rally I began to think it might test the weekly channel, which it did.  Previously I posted that I expected an EWT retrace down, which we got and I label this 1-2 (green).  This topped and turned back down right at the weekly trend line (actually a confluence of 2 lines on my weekly chart).  The retrace made only the Fib 38% before rallying hard with a breakout of the weekly trend line and key horizontal resistance.  The market is currently pausing at this point and on my 1H chart it looks to be consolidating in a short term Flag formation.  If this breaks out hard to the upside I doubt we will see it at these levels again fora long time.  This is assuming this breakout will be more like the 1975 or 1994 rally and not the 2004 one, which is likely to be the case in my view because the bearish phase was in an A-B-C, after which we get a strong motive 1-5).  Note also several price gaps, not uncommon it seems in this market but still these are a series of breakaway gaps, which are very bullish.  Given the potential to hit the market maximum zone (30000+) there isn't much out there that compares to the potential on this market.  To @TrendFollower point on this similar thread a wide stop would be indicated at this time, circa 10.500 below the wave 2 (green).  Having said that, other than a small stop hunting spike back retest through the key resistance/support levels we are at, I would not expect the market to penetrate this 11,500 level once it rallies away so once we see price rally hard stops at break even on a breakout would be appropriate for me (i.e. stops below 10500 until you see a strong rally away over a few days/weeks then move to BE).

For the record I am Long Coffee for a long term trade (futures route) and seeking to add on any breakout.

 

[Mercury]

Technicals are a reflection of the market dynamics and as such do not drive the market.  No technical analyst worth their salt would suggest they do, although I have heard people talk about self fulfilling prophesy effects, which I discount as only short term at most and therefore not relevant to me.  Some techniques also focus on mapping sentiment (principally denoted as Fear and Greed) over time and as human nature and sentiment related to human nature are consistent a technical analyst can indeed use a purely technical approach to both time the market and forecast likely scenarios and probability weight these.  However I have always preferred to set my technical analysis within a fundamentals (or rather macro) context.  This doesn't have to be complex.  In the case of stock indices it happens to be very complex but in the case of soft commodities like coffee it is rather simplistic.  As I mentioned at the start of this thread, at current prices coffee plantation owners cannot make sufficient money to make ends meet so price has to go up.  Add to that a general level of depressed soft commodities prices across the board and you get what the pros are calling the "reflation trade" (don't know why they always have to give thing a name...  Marketing I guess...).  When this occurred to me I checked the price charts.  Fortunately IG have a lot of history on this market, alas not on some of the other softs, which rule them out for me.  Even a cursory look at the charts tells you price is going to go up at some point, probably soon.  Given the fundamentals backdrop I then used purely technical analysis to do the rest and have caught a few good swings before catching the upswing we are now in.  Once stop protected at BE I do not need to watch fundamentals any further, just manage via price action towards my targets (i.e. trend following!).  This is my method and it has proved successful over the years so I see no reason to change it.  Obviously there are many approaches, I do not suggest any of these are better or worse, just not for me.  In fact I like to see people with different methods either agree or disagree as this makes me think about things from a different perspective.

So there it is, perhaps we can agree to disagree and see where coffee takes up.  Happen we cold both wind up right through different means but in the end it is all about making profits.

[dmedin]

If it means coffee prices go up I will certainly be a loser, because I drink it by the gallon

[Mercury]

I think we can all relate to that @dmedin.  You raise an interesting point from an investment and trading perspective as well as a couple of issues prevalent in the wider economy.  Quite a lot for one thought...

It is firstly noteworthy that the price of coffee in an average coffee shop has increases steadily over the past 10 or so years.  I don't know the exact stats but in London you could get a coffee for less than £2.00 10 years ago and now it is closer to £3.00.  In the same time period the commodity price of coffee went up X2 and dropped X2 but retail coffee prices just kept on rising steadily.  If you then look at the economics of a cup of coffee (see link to an FT article below) you will see that the price of coffee itself is only 10% and only a fraction of that is coffee itself.  The 4 big cost drivers are: 

1. Company profit requirements
2. Taxes (which I assume includes rates)
3. Staff costs
4. Shop & Rental

https://www.ft.com/content/44bd6a8e-83a5-11e9-9935-ad75bb96c849

So if coffee does shoot back up to the 30,000 (I think that is $3/lb) from the current 11,000 the impact on the retail price, and perhaps even on the corporate profits, will be minimal but the growers will benefit so that's cool.

This illustrates a number of economic issues for me, which may play out in the near future as follows:

• Actual producers of valuable stuff are getting screwed and this is exacerbated in poorer countries that do not benefit from price protection of organisations like the EU or the United States federal government.  If anything illustrates the negative issues in the current capitalist and political system this is it.  Not to make a political statement but surely the answer to issues like migration pressures is to support people producing stuff in these countries such that they can make a decent buck and improve their local economies accordingly.
• This leads me to the next major issue, which is the incessant focus on growth.  This is truly the most decisive and short sighted part of modern economics as pertains to capitalism for me.  Everyone involved should be mandated to read a book called limits to growth (an ecological work not economic but there are interrelationships).  The capitalist system we have is predicated on the value of the company going up only if you get growth, as opposed to just being profitable and producing free cashflow.  This is changing a bit but only because of financial engineering rather than as a philosophical and fundamental change in the model.  As we hit the top of population curves (hopefully cos if we don't we are all screwed, and I don't mean economically) growth will go into permanent decline.  In short we need a new model, fast!  I suspect we will have to wait for an almighty collapse before the powers that be get this or indeed until we get new powers than be...
• Governments are struggling to raise revenue and the need for politicos to promise the earth (literally in recent times!) puts even more pressure on funding.  Debt raising is all but tapped out (one reason the Corbyn/McDonnell Marxist policies would be a catastrophe for the UK as any attempt to raise the kind of debt they are talking about would push the UK over the edge of credit rating and crash the GBP, thus making their low interest argument redundant as the rates the UK would have to offer on Gilts would be astronomical and then bang goes the housing market and then follows rampant interest rate rises, inflation and collapse but that's ok cos it will be fairer...  Basically Venezuela!).  But bring it back to coffee, local government have been screwing their retailers with rates, which is making owing a local shop unviable.   They are killing he goose...  In addition central governments can't get tax revenue from international internet based companies, mostly US based.  The EU seems incapable of dealing with this issue and globally there is no consensus for the kind of new tax regime needed to address the issue.  Thus the rich (Bezos etc) get richer.
• The property bubble and the related systemic "need" for property trusts to generate yield, which is their version of growth, leads to rent inflation that is disconnected to the underlying economics (i.e. retailers cannot make a profit).  Again the property trusts are killing the goose and in most cases the actual investment cost is far far lower than the revaluations they use to calculate current yield requirements.  Interestingly enough if and when we get a property crash their yield will automatically improve because the valuations will plummet.  Funny ol world...  Of course all their customers will be out of business so no free cash flow.  Oh well you can't have everything I guess...
• Lastly, with the above economic model squeezing growth, companies look to  control their costs, the biggest one typically being staff costs, which is why we haven't seen the kind of wage inflation we might have expected from a recovery (which it isn't really).  When all the above chickens come how to roost we will get massive job losses, the last shoe to drop in the economic cycle leading into a recession.  The look out below!

And all that from a cup of coffee, who knew...

[Mercury]

Coffee appears to have staged a confirmed breakout, early days and we will need to see some strength for the rest of the week to be more assured.  Ignore the purple line on my daily chart it is a weekly line that doesn't map well on PRT (quite a weakness that).  It more closely aligns with the blue daily trend line, as you can see from my post on Saturday last.  We are seeing a bit of opening weakness but nothing concerning as yet and a break higher will be very encouraging.

[Mercury]

Very happy with my Longs on this one and each week seems to be bringing higher highs at present, long may it continue...  If we do get a continuation we may seem some serious movement on a daily basis.

 

[Mercury]

Coffee looks like it is setting up for a retrace back down for a while if it ends like this or worse.  I took profits on mt near term Longs at the key resistance level and will await events for a while...

[dmedin]

On 24/11/2019 at 11:05, Mercury said:

Everyone involved should be mandated to read a book called limits to growth (an ecological work not economic but there are interrelationships)

A book by David Harvey would also be a good idea.  https://smile.amazon.co.uk/Enigma-Capital-Crises-Capitalism/dp/1846683092/ref=sr_1_8?keywords=david+harvey&qid=1575651020&sr=8-8

[dmedin]

Kate Raworth's Doughnut Economics too.

[Mercury]

Final hours of trading put in some bearish candles that may be a precursor to a period of bearish retrace if the 1H channel is broken on Monday.  If it does I will be expecting an A-B-C form retrace that may retest several support levels before a resumption of the long term Bull.  This is an opportunity to buy in lower, but patient is needed, it may take some time to evolve.  I have a cheeky Short in place...

[DilmorJohn]

It's good to know that, thanks.

[dmedin]

You're very welcome.

[dmedin]

JAY-SUS.  😮

 

Edited December 10, 2019 by dmedin

[dmedin]

Given the high leverage for a single contract / point, and the big spread (20 last time I looked), it would be nice if we could trade coffee options.  The current selection of options is very limited.

[dmedin]

Buying interest is growing:

[dmedin]

Is this a good price to get back in long?

[Mercury]

Turns out it was a good place to go long @dmedin, although I didn't.  I am seeking a much more definite pull back to get Long again.  I did trade the previous move down for a decent day trade and now possible another presents itself.  Not for the fair of heart this one but price is at a major long term support/resistance point and the market is due (as much as that can ever be said, especially of softs) a correction.

[Mercury]

Short Arabica is going well.  Small rally on opening offered a chance to pyramid a bit but at present I see this as a counter trend move rather than a reversal.  That said the pin bars on the weekly chart (last week and this so far, obvs not done yet) are suggesting it could be something more.  In the meantime my first target is around the 12600 level and then let's see.  Nice to have something to get you teeth into while waiting for US open and USD to resolve...

[dmedin]

@Mercury Quite right, and I agree this isn't one for average retail clients (like me).  I mean, you pay £20 to IG just to initiate a trade (permanent 20 point spread) and the leverage is stupid.  Plus you get a move like this, down over 400 points.  Still looks like a good buy at the pivot point though  

 

Edited December 19, 2019 by dmedin

[Mercury]

2 hours ago, dmedin said:

Still looks like a good buy at the pivot point though

Not quite yet.  I am in a bit of a quandary on spotting the landing here.  It is possible this current phase from late yesterday and today is a wave C, which could carry all the way to 11500.  Equally the whole move from the turn could be a wave A, which is more likely to turn between now and, say, 12400, after which a strong wave B rally is next followed by an even stronger wave C to 11,500.  Watch and wait and look for turn signals.