Coffee breakout could provide profitable trade

Since reaching a peak of 1.855 in early October 2012 the price of coffee has fallen more than 23%. Last week however, coffee broke out of a multi-month Falling Wedge trading pattern which could signal a reversal of this downtrend and could provide a profitable trade.

Last Thursday the price of coffee broke through the upper downtrend line (circled) that had capped the price for more than 6 months. Trading on Friday saw a further advance with the price of this volatile commodity breaking through its 50-day moving average.

A 9 month (daily) chart of Coffee (Click on the chart for a larger version)

A 9 month (daily) chart of Coffee (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As the chart shows, the breakout began from a retest of the low on 15 April when the price action formed a long-tailed candlestick (green arrow). The long tail (also referred to as a shadow or wick), indicates that the bears controlled the market for part of the day but lost control by the end of the day as the bulls made a notable comeback.

This type of candlestick is often seen at significant turning points and in the case of coffee it marked a reversal in the trend that set the scene for the advance.

Where will coffee go next?

A target price for a breakout from this type of chart pattern can be calculated by adding the widest part of the wedge onto the breakout price. In the case of coffee the potential price target is 1.745.

The initial target however, is the 200-day moving average and those looking to profit from this breakout should tighten their stop loss or take some profit as the price approaches this level.

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