Coffee completes a significant top formation

Key points:

• Coffee futures closed at a new 252-day low
• The low represents the first instance after a 252-day high
• After similar high-to-low reversals, coffee collapsed over the next six months

Coffee completes a significant top formation with a new 252-day low

In a previous note, I shared a study that suggested one should avoid buying a momentum breakout in coffee. Since the publish date, coffee futures have fallen almost 20%.

The momentum breakout bull trap is complete, with coffee closing at a new 252-day low. The low represents the first instance after a 252-day high. 

Similar high-to-low reversals preceded negative returns

The 252-day low in coffee suggests the commodity could collapse in the next 6 to 12 months, with negative returns, unfavorable win rates, and z-scores. The price pattern shows a negative return at some point in that time frame in 11 of 14 cases.

Coffee is reversing lower after a historic multi-year surge

The reversal from a 252-day high to a 252-day low comes after a significant rise in coffee prices over a 2-year time frame.  While rare, the breakdown in the commodity suggests a reversion to the mean. 

For investors without a futures account, the iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO) is an option for traditional equity-based brokerage accounts. This is not a comment on the acceptability of JO as a trading or investment vehicle; rather, it's simply to note that it is one of the few ways for non-futures traders to bet on or against coffee prices.

What the research tells us...

Coffee is breaking down from a significant top formation after a multi-year surge. Similar high-to-low price reversals suggest the commodity can fall further, especially on a 6 to 12-month basis.