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It has been a while since my last coffee article and given the present market action I thought it would be a good time to take another look.

I think most would agree that by looking at the number of shorts in the market Coffee appears to be oversold. That begs the question if so why are the indicators not reflecting an oversold condition? It is my opinion that oversold indicators have been held in check because Coffee has declined in such an orderly manner with the occasional short term limited rallies. Looking first at the Relative Strength Index (RSI) as an example we see that when July Coffee closed at a new low of $88.00 on May 7 the RSI was at 32. This was possible because of a rally from a close of $89.65 on April 17 to a close of $93.15 on April 30 when the RSI went from 31 to 44.

Looking at our in house model which I prefer we have a similar situation. The Negative Indicator has spent most of the time between the First Standard Deviation of the 194 week average. To give a little background we know that a commodity will spend most of its time within the First Standard Deviation of the long term average. Secondly in my opinion it will spend about 30% of the time above the Second Stand Deviation and finally around 5% give or take above the Third Standard Deviation. Coffee has been no different. Looking at the most recent past of the Negative Indicator on the weekly close of June 15, 2018 and then on October 5 and again on October 19 Coffee briefly violated the Third Standard Deviation and quickly retreated. From May of 2017 to January 2019 Coffee violated the Second Standard Deviation only seven times. This brings us to the present which shows the Negative and Positive Indicators within the First Standard Deviation of the 194 Week Average. The Negative Indicator shows the most volatility as is usual since the longer term trend is lower. This takes me to our other in house model the H.Y.D.R.A.N.T.

Looking at July Coffee this is what we know. Coffee is in a definite down trend needing close this Friday at or above $101.20 to reverse the trend. I think we would all agree possible but not very probable, but then, but then. A close at or above $100.45 on Friday, May 24 will turn the trend. Failing that a close at or above $96.65 on Friday, May 31 will turn the trend higher. As time goes on through June failing a major break in the market it will become progressively easier to reverse the trend to bullish.

So what to do? I suggest one begin looking at the $89.00 to $91.00 level to get long July Coffee using new lows as a stop.

If you have any questions or comments you can call me at 1-877 304 1369, or email me at

There is significant risk involved in trading futures and/or options on futures. Futures and/or options of futures trading may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions. Past performance is not indicative of future results.

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About the author

Lee A. Gaus is a forty year veteran of the commodity futures industry.  After graduation from Illinois State University Lee began his professional career with Cargill of Minneapolis and then moved to Archer Daniels Midland of Decatur, Illinois.  After stints in the areas of animal nutrition, soybean processing and grain merchandizing Lee began specializing in commodity futures trading.  After being transferred to Chicago Gaus rose to the position of Senior Vice-President.  In 1992 Gaus was a founding member of EFG Group, and later International Futures Group.  Gaus has always had a deep interest in what appears to be the random movement of numbers.   Today Gaus combines old formulas with formulas of his own design in an attempt to discover fair valuations.  

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