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Coffee: Contracting Volatility with Breakout Potential

Coffee is at its lowest volatility level in the last two years. That alone doesn't mean coffee is doing to spring into action, but over the last ten years volatility has escalated after reaching current levels (Average True Range (ATR) is below 2.96).

The March contract broke below a range that had been established over the last couple months, hitting a low of 113.6 on January 11. An event like this could spark an increase in volatility in two ways:

  • The price continues to fall, with the next support not coming in until the 100.95 2013 low.
  • The price stalls near the 133.6 January low and bounces. This would indicate a false breakout, likely trapping a few traders and potentially fueling a bigger rally.

Figure 1. March Coffee Daily Chart

On the morning of January 13 March coffee has broken to the downside, but is toying with the possibility of a false breakout as the price has bounced and is trading near the original breakout point at 115.3.

Coffee is in a long-term downtrend after peaking in late 2014 at 230.75, so the downward momentum favors a decline toward the 2013 low of 100.95. The range between November and early January is 13 points high. Subtracted from the breakout price, that gives a potential target of 102.3.

A rally back above 118 will convince a lot of traders the downside move was false, and that opens the door for a run to the top of range near 126. A rally above the range high at 128.3 means the October swing highs near 140 could be tested.

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