Question: Is it possible to update my google app engine java application without dropping user traffic?

Answer: 
AppEngine deploy procedure doesn't put your site nor your data in offline/read only mode. As far as the deploy is implemented your user won't notice any issues (as long as your new code didn't introduced any)
yes u can .. 
gae projects allows multiple versions for the same project ,you can have upto 8versions i think ..

say ur application name is abc.com

u can deploy ur project to another version like 2.abc.com 
and when ur okay with the version 2.abc.com
you can change that to default in GAE . 
Now refering to abc.com will actually refer to 2.abc.com this will not affect any of ur traffic