What can one day’s price action tell you about the future?
Most of the time, the answer is nothing. On most days, price moves are noise, nothing more.
If Apple (AAPL) falls 0.2% today, it doesn’t tell you anything about future growth. And if Microsoft (MSFT) rises 0.5%, it doesn’t say much about investor sentiment.
But every once in a while, when you have a huge daily change, it can tell you something about the future…
That’s the case in a certain beaten-down commodity right now. It just saw its worst one-day fall since 2015.
This one-day fall says prices could decrease another 20% over the next year, based on history. And that makes this one of the rare cases where a single day’s price action actually matters.
Let me explain…
The price of coffee crashed 6.2% on June 5. It was a major change in direction for the commodity.
Coffee had been making a solid move higher. It had just soared 20% in less than a month. And that May rally was one of the rare signs of life the commodity has seen in recent years.
Like many commodities, it has been falling… and falling. Prices have been more than cut in half over the past five years. So a quick 20% rally had folks interested and excited.
It was a short-lived move, though. Take a look at the massive one-day fall we saw earlier this month…
The uptrend was in place… It was the first sustained move higher in almost a year. But that changed in a single day. And this is one of the few cases where a one-day move actually matters.
That’s because one-day crashes this huge are darn rare. They’ve happened less than 1% of the time for coffee… And they’ve been even more rare in recent years. We’ve only seen three similar moves over the last decade.
History says these falls are an ominous sign of a continued downtrend. Coffee prices tend to plunge after massive one-day falls. The table below shows it…
Like many commodities, coffee has a history of going nowhere over the long term. The commodity has actually seen a typical annual loss of almost 1% over the past 38 years.
That aside, major one-day falls tend to precede much larger losses than normal. Similar instances led to losses of 2% in three months, 7% in six months, and a significant 20% loss over the next year.
These are awful results… And they show how important the trend can be in this commodity.
Usually, one-day moves are useless. They’re just noise. But when you see a major one-day move, it can mean something for the future.
In the case of coffee, this month’s massive one-day fall says more losses are likely. The commodity is already beaten down… But don’t expect the pain to end anytime soon.
Good investing,
Brett Eversole
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Source: Daily Wealth
