Technical Analysis #C-COFFEE : 2016-10-21

Lower crop estimates support coffee

Coffee output estimates of major producers for 2016-17 are being downgraded due to unfavorable weather conditions. Will coffee continue rising?
The research group Procafe reported its first forecast for 2017 output for Brazil, the world's top coffee-producing nation. It estimates 39m 60-kg bags of both arabica and robust beans will be produced by Barzil, about 20% lower from the near 49m bags harvested this year. Earlier the International Coffee Organization had forecasted lower estimates for major producing countries. The output in Vietnam, the second largest coffee growing country, is expected to fall in 2016-17 due to dry weather prevailing since the beginning of the year. And the La Nina weather phenomenon is expected to reduce the 2016-17 coffee crop of the third ranked producer Colombia. Lower crop forecast by Procafe, which has a reputation for conservative estimates, supports the bullish outlook for coffee based on the International Coffee Organization estimates.

On the daily chart COFFEE:D1 has been rising the last two weeks following the pullback after hitting 19-month high on September 22. It is above the 200-day moving average MA(200) as well as the support line of uptrend.

• The Parabolic indicator gives a buy signal.
• The Donchian channel indicates no trend yet: it has a zero slope.
• The MACD indicator is rising and the gap with the signal line is widening, which is a bullish signal.
• The stochastic oscillator is in the oversold zone edging lower, this is a bearish signal.

We believe the bullish momentum will continue after the price crosses above the last fractal high at 161.59, confirmed also by the upper Donchian bound. It can be used as an entry point for a pending order to buy. The stop loss can be placed below the last fractal low at 146.82. After placing the pending order the stop loss is to be moved every day to the next fractal low, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. If the price meets the stop-loss level (146.82) without reaching the order we recommend cancelling the position: the market sustains internal changes which were not taken into account.