Coffee Kick Starts the New Year

How many times have you heard the old cliché “I can’t start my day without a Coffee”?

For this week’s newsletter I would like to amend the saying to, “I can’t start my new year without a Coffee Futures Contract”.

In Issue #130 of the Trading Tutors Newsletter I wrote an article on Coffee. In that article I showed the weekly bar chart of Coffee (KC-SpotV), reproduced below as Chart 1. The chart shows how Coffee had travelled from the December 1999 top to October 2005.

The main point of interest in Chart 1 is the test of the 50% retracement level in September 2005 where coffee found support. This was the point where Coffee reversed its downtrend and moved into a new bull market rally.

Chart 1 – Coffee Weekly

Looking at the most recent daily price action in Coffee (see Chart 2 below) we can see that the market has indeed rallied from the September 2005 low.

Prior to this low being formed, a strong area of resistance was encountered around the 108.50 level. This resistance level was again tested in November and December, as highlighted by the yellow circles on the chart. In the first week of January 2006 this resistance was broken and Coffee forged its way into the New Year.

Chart 2 – Coffee Daily

Below in Chart 3 we can see how the last trading day in 2005 created the Point C day of the simplest of setups – the Safety In The Market ABC Long Points setup.

Entry into this trade was triggered on the first trading day of 2006. A break upwards through the resistance level of 108.50 was valid confirmation of the strength of this trade. The trade travelled 200% of the previous range in just the first four days of the year.

Chart 3 – ABC Pressure Points

The 200% pressure point is a major resistance level and this was the opportune time to take profits by exiting the trade. This occurred on the fourth day of the trade.

The details for this trade are as follows:

Entry = 107.55 cents

Exit = 118.90 cents

Price Movement = Exit – Entry = 11.35 cents

Tick Movement = 11.35 / 0.05 = 227 ticks

Profit = 227 x $18.75 = $4,256.25 USD per contract

*Note - the minimum movement, or tick, in Coffee is 0.05 cents (5/100ths of a cent), and each tick is worth $18.75 USD.

What a great trade for Coffee to kick-start the new year!

The big question now is: Will the coffee rally continue through 2006?

We can see the past three weeks have seen coffee consolidating at this 200% extension level. I expect coffee to move higher and will be looking for the next opportune bullish entry.

Trade Smart,

Mario La Marra