Bailouts Aren't Only for Banks
Fundamentals
Coffee futures have rebounded from oversold conditions earlier this month to trade at the highest levels in over a month. The Brazilian government entered into an agreement with domestic growers to buy 3 million bags of Coffee at a significant premium to the ICE futures prices. This has caused exports of the caffeinated bean to fall and has created tightness in supplies as a result. The Brazilian government, fearing a collapse in prices, made such a move in an attempt to establish a price floor for the commodity. The government is also expected to announce further aid to growers in the coming weeks, which could be supportive of prices. Traders have had a difficult time making sense of the weather situation in Brazil. Forecasters are expecting ample rain in the weeks and months ahead, but how the rain will impact the crops is unknown. Too much rain could impede the current crop harvest and result in premature flowering of the 2010-2011 crop, both of which can be seen as supportive of prices. On the other hand, the ample rains could result in a large bumper crop, which could counteract the government intervention and weaken Coffee prices. Like other commodities, Coffee has gotten a boost from the recent upswing in the equities market. Economic data released this week was significantly more upbeat than in prior weeks, giving traders some hope that the global economy is, in fact, recovering. The market has priced in further aid from the Brazilian government, so traders may take their cue from the equity and currency markets in upcoming sessions.
Trading Ideas
Both the fundamental and technical pictures have improved, but questions still remain. Traders may wish to enter a long position in the futures contract on a close above 130.00 with a protective stop at 127.25 and an objective of 140.00.
Technicals
Turning to the December Coffee chart, we see the market rebounding from oversold conditions in late June and early July. The market is now quickly approaching overbought levels on the RSI and resistance near the 130.00 level. In order to have its positive short term momentum spill over to a longer term positive bias, the Dec Coffee contract must close above the 130.00 mark. Failure to do so could result in range-bound trading between the 120.00 and 130.00 levels. The 130 mark is also significant for moving average watchers, as it coincides with the 50-day moving average.
Rob Kurzatkowski, Senior Commodity Analyst
