Coffee has been in a strong uptrend during the last five months, climbing up from 100 to above 217, which was quite impressive. But as traders we must not get emotional and over-optimistic. Instead of buying just because prices are rising, we prefer looking at the charts, in order to see if they will keep going north. Below you will see the 4-hour chart of coffee’s May futures.
It is visible that coffee has been rising impulsively. According to the Elliott Wave Principle, after every five waves, a correction should follow. So in our case, we should expect a three-wave decline, which could lead prices back to the 160 area or even lower. This statement is further confirmed by the Relative Strength Index indicator, since it shows a typical bearish divergence between waves 3 and 5. Even though we may now have enough evidence not to be bulls on coffee, we might want to get a closer look into the wave structure in the white rectangle. If we can count five waves to the south there, we will gain a little more confidence.
There it is. Five waves down showing us the direction of the newborn trend and confirming our bearish outlook. Only time will tell, whether we are right or not, but our main goal in the Markets is to be bullish at bottoms and bearish at tops and that is exactly what the Wave Principle is preparing us for.
Charts by www.trader.bg