June Divergence and Reversal Lessons from Commodities Corn Wheat and Coffee

Jun 5, 2014: 4:47 PM CST

Recent swings and reversals in commodity markets give us an example to study lengthy divergences and reversal trading tactics.

Let’s take a look at these larger reversals, note the supply/demand shift, and the dual divergence chart signals that preceded these reversals (for lessons of identification and trading similar situations in the future).

We’ll start with Corn (@C):

After a similar Rounded Reversal pattern off the January lows (with divergences), we see a peak into the $520 level on a triple-swing (three price highs) negative momentum divergence into a resistance level.

Note the three spike-reversal candles that developed into (above) the upper Bollinger Band level also into $520.

The lengthy negative volume and momentum divergence undercut (failed to confirm) the price high into the resistance ceiling.

Generally we measure price (uptrending or making higher highs) along with momentum and volume (forming lower highs) and note the lower lows in volume and momentum with the higher highs in price.

Divergences never guarantee reversals, but divergences often precede price reversals.  We still need price to confirm the reversal by breaking key support levels or else the rising 50 period EMA.

Next up is Wheat (@W):

Similarly, Wheat formed a sharp reversal up off the January low and then trended up into a slight double top or clear negative momentum and volume divergence into the $736 level.

Likewise, price traded down back to the rising 50 EMA and then broke the rising trendline and 50 EMA level to develop a sell-signal and breakdown event.

Finally, we have a similar reversal example in Coffee (@KC):

Coffee formed a similar double-top or clear dual divergent high above $210 like Wheat.  Price traded down to the rising 50 EMA and then broke the level for a confirmed sell-signal to trigger a reversal.

Among the other lessons to study from these charts, pay close attention to the interaction of the price trend – final price high – and the negative dual divergence with the momentum oscillator and volume.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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