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Coffee Prices Have Soared Since June. Here's Why

The Only “Channel” Commodity Investors Should Be Watching

by Nico Isaac
Updated: November 04, 2016

A common routine adopted by investors and traders in global commodity markets involves these two steps:

Wake up

Turn on the TV, radio and computer and flip back and forth between channels, monitoring the constant news events streaming in and out of the markets you follow

Channel 2: Politics. Will the latest political scandal surrounding the upcoming U.S. Presidential election hurt or help prices?

Channel 4: Weather. Is a tropical storm approaching major growing regions, OR will El Niño cause a supply-curbing drought?

Channel 6: Global Economy. Is China's manufacturing sector picking up, indicating a rise in future demand for raw materials?

And on, until you're up to your eyeballs in a deluge of news -- so much, in fact, that it becomes difficult to see over the pile.

So, what do you do?

Well, we believe commodity markets do react to certain news events -- temporarily. But those events are secondary to a more sustained force; namely, investor psychology, which unfolds as Elliott wave patterns on a market's price chart.

Occasionally, an Elliott wave analyst can even draw a clear boundary containing price action, called a trendchannel; those parallel lines are then used to help identify potential break-out points to the upside or downside.

There's no overstating the value of trendchannels, as our own Chief Commodity Analyst Jeffrey Kennedy knows quite well. In his experience, trendchannels, and the lines which form them, can improve your trading in FIVE simple ways:

  • They identify the dominant psychology of investors, be it bullish or bearish
  • They define support and resistance levels
  • They give advanced warning of potential breakout points
  • They identify critical moments in time
  • They confirm when the trend has turned

Take, for a real-world example, the mid-2016 upsurge in coffee prices. In early June, all mainstream eyes were tuned into the weather "channel" in coffee's backdrop. Namely, how favorable growing conditions had led to "the second-highest crop of all time in Brazil."

A record coffee crop supposedly sent a bearish message: "It is questionable whether prices will make any further gains." (Agrimoney.com)

But then there was Jeffrey Kennedy, who kept his station tuned to the trendchannel on coffee's price chart, one which set the potential stage for a major move to the upside. In our June 8 Daily Commodity Junctures, Jeffrey wrote:

"Coffee is at a critical juncture. In fact, what happens as we move into next week will most likely determine the direction of coffee prices for the remainder of the year.

The bearish case in coffee was severely damaged with today's advance above the March and May highs.

"As you can see in today's price charts, though, a well-defined base channel is now discernible. A rally in coffee well above the upper boundary line of this base channel would signal the presence of third-wave price action and signal further rally to initially 155.50."

The next chart captures the trendchannel-contained rally in coffee prices since then:

Now, Jeffrey uses this same, 9-month long trendchannel to determine whether coffee prices are set to continue higher.

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