|
Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Yesterday, we saw how rising agricultural commodity prices are adding pressure to food inflation.
And in the process, taking a big chunk out of consumer budgets.
Today I want to continue this theme by looking at a commodity considered essential by many… coffee.
When we checked out the iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO) back in December 2021 (red arrow on the chart below), it had been in a strong long-term uptrend.
In the year prior, rising fertilizer costs and supply chain disruptions had seen JO’s share price more than double.
When we looked at JO in December, it was retracing off the back of a fresh high (A).
Let’s look at the chart…
iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO)
Source: eSignal
That high at ‘A’ coincided with the Relative Strength Index (RSI) going into overbought territory at ‘1’ (above the upper grey line).
After a brief pullback, JO soon rallied to a higher high at ‘B’. However, this time the RSI made a lower high (2).
We know that divergence between the share price and the RSI (shown by the orange lines) often warns us about a change in direction.
That’s exactly what we saw…
From that high, JO fell around 12% through December and into the start of 2022. After bottoming out in early January, JO then rallied to its all-time high (C).
This most recent peak once again coincided with the RSI forming an inverse ‘V’ (3) in overbought territory (upper grey line).
As the RSI fell through support at the green line, the 10-day moving average (MA – red line) crossed down over the 50-day MA (blue line). This added to the bearish sentiment.
So, what can we expect from here?
Well, the RSI offers some valuable clues…
Take another look at the chart…
iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO)
Source: eSignal
After falling below the green line, the RSI formed a ‘V’ in oversold territory (lower grey line) at 4.
From there, the RSI made a higher high at ‘5.’
But unlike the divergence we saw from last November to December, this time the share price also made a higher high (D to E). So, both the RSI and share price are heading in the same direction (red lines).
More recently on March 31, the RSI broke back into the top half of its range. That’s a bullish signal.
After testing and holding the latest support on April 7, the RSI is moving higher again.
The recent action in the RSI has flowed into the price. As you can see, the JO share price just traded above the longer-term 50-day MA.
If the 10-day MA crosses back above the 50-day MA – which looks likely over the coming days – that will add to the bullish sentiment.
From there, the next test is a break back above the dark blue horizontal line at ‘C’. For that to happen, we’ll need to see the RSI remain in the upper half of its band.
Right now, it’s still early. But, the chart shows promising signs of a bigger move ahead.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. We’re excited to hear what you think of your new eletter, Trading With Larry Benedict. Let us know at [email protected].