Over the last two months, the coffee market has been about as thrilling as a plate of turnip greens. Prices have been stuck side bound since May, never rising above $1.40 or below $1.30.
Yet -- on Thursday June 10, that all changed when coffee prices made like the Incredible Hulk and burst out to the upside in a powerful rally to seven-month highs.
Get this, though. In the days leading up to the June 10 lift-off, the fundamental experts had prepared an extensive, A - to - Z laundry list of bearish factors weighing on coffee. (See top five below) So, if there was any breaking out to do, it should have been to the downside.
- Currency gains: "Coffee tumbles to one-week low due to a strong dollar." (Associated Press)
- Global credit crisis: "Coffee falls. The market's footing remains tenuous as debt worries in Europe make investors jittery." (AgraNet)
- Negative economic data: "July coffee closed down on disappointing US employment data. Stand aside for now." (Futuresmag.com)
- Strong supply: Brazil, the world's leading coffee producer, expects a 20%-plus increase in the 2010-11 harvest from last year's totals.
- Negative seasonal patterns: "June is the worst. It's like betting on blackjack -- there are times when you're supposed to up your stake; this isn't one." (Bloomberg)
In fundamental terms, the recent rise in coffee makes no sense. But, in terms of Elliott wave analysis, the market's gains are right on schedule.
Here, the June 10 Daily Futures Junctures sheds an objective light on the situation via the following close-up. Notice the huge, multi-month pattern containing two parallel lines and five waves circled a through e. This is a classic contracting triangle.
A contracting triangle, or "horizontal" as it's known for its sideways direction, contains five overlapping waves labeled A-B-C-D-E. In a regular variety, the triangle takes place entirely within the area of preceding price action. In a running triangle, wave B exceeds the start of wave A to set a new extreme. All triangles occur in the position prior to the final actionary wave in the pattern of one larger degree, i.e. wave 4 of an impulse, or wave B of an A-B-C. And finally, once a triangle is complete, it is often followed by a swift, short "thrust" in the opposite direction.
The recent sharp turn up is such a thrust. Whether this rally is set to last -- well, that's the very question that EWI's chief commodity analyst and Futures Junctures Service editor Jeffrey Kennedy answers in the June 10 Daily Futures Junctures.