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Coffee Breaks Out of Descending Wedge Reversal Formation


After peaking at 232 in October of 2014, September coffee futures (KC) have been on a steady decline, recently reaching a low of 119.85.

Since April the descent has moved within a declining wedge--a pattern where the price action narrows (like a triangle) but the price continues to make lower highs and lower lows.

Wedges are often considered a reversal pattern because momentum is slowing (the wedge) for the current trend. This isn't always the case, but in the case of coffee it may be.

Figure 1. September Coffee Futures - Daily Chart

The downtrend and recent wedge have moved the price pretty close to where a lot of excitement began in early 2014. Coffee was trading near 125/130 before it exploded higher, to above 200, in a matter of weeks. When "trigger" areas like that are tested, they often profit support.

This combined with the wedge breakouts indicates coffee may see more of a rebound.  For an approximate target, take the height of the wedge and add it to the breakout point. That provides an initial target near 145. After that, if the price pulls back and holds at a higher low (and then begins moving higher again) the reversal is likely in place. With an uptrend underway traders can then look for higher targets based on how the price action unfolds. 

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