The coffee trade is setting up for another bounce.

When we pocketed a 30% gain on the iPath Bloomberg Coffee Subindex Total Return Fund (JO) last month, I wrote that we’d look to get back into the position when coffee relieves its overbought position and comes back down toward a support level.

I didn’t think it would happen so soon. But here we are…

Let’s start with an updated chart of the price of coffee…

Since early November, the price of coffee has fallen from $1.74 per pound to $1.39. That’s a 20% drop in one month.

That sort of a decline has created severe oversold conditions on many technical indicators. As you can see below, the moving average convergence divergence (MACD) indicator and the relative strength index (RSI) are more oversold than they’ve been all year.

The chart of JO looks the same…

Last Friday, shares of JO closed at $19.81. The stock is sitting just above its support level at $19.75… with additional support at about $19.30.

[ad#Google Adsense 336×280-IA]With the technical indicators so oversold, this is a logical area for traders to look for a bounce.

Notice, though, that the MACD indicator doesn’t have any positive divergence yet.

In other words, as JO has been making lower lows, the MACD indicator has fallen right along with it.

That tells us the downtrend is strong.

Any rally attempt will only be short term.

So coffee is setting up for a short-term trade right now… not a long-term commitment.

Take a look at this 60-minute chart of JO…

On this chart, you can see the makings of a “bullish falling wedge” pattern. This pattern usually breaks out to the upside.

You can also see the positive divergence on the MACD indicator and the RSI. This tells us that JO is setting up for a short-term bounce.

If JO can break out of the wedge to the upside, then it could run to its first resistance level at about $21.40. That’s about a 9% gain from Friday’s closing price.

That’s a trade worth making.

But… don’t stick around too long. Remember, the daily chart isn’t set up for a longer-term rally.

Aggressive traders can buy JO right here at about $19.80. Then, look to sell it on a solid bounce within the next two weeks.

Best regards and good trading,

Jeff Clark

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Source: Growth Stock Wire