Bullish Trend in Coffee Getting Cold
Fundamentals
As happened with its cousins in the "softs" complex Cocoa and Cotton, the Coffee bull market has taken a pause, a victim of a resurgent U.S. Dollar and long liquidation by commodity funds. Coffee fundamentals still look positive, with the USDA estimating 2009-10 world Coffee production at 125.2 million bags, down slightly from the November International Coffee Organization (ICO) estimate for the 2008-09 season crop of 128 million bags. Lower production is expected out of Brazil this coming season, with the USDA estimating production at 43.5 million bags, vs. 51.5 million this past production year. Coffee output is also expected to decline in the major Coffee producing countries of Vietnam and Columbia this upcoming season, which has contributed to the bullish tone the past few months. Both large and small speculators are net-long Coffee futures according to the most recent Commitment of Traders report. As of December 15th, the combined net-long position of non-commercial traders totaled 41,190 contracts, which was up just over 6,000 contract for the week. Since that time, the most active March contract has lost nearly 7 cents per pound, as a stronger U.S. Dollar has taken the luster off commodities, causing long liquidation and position squaring ahead of the New Year. Although the longer-term trend is still bullish, we may need to see further long liquidation by speculators -- especially those who came late to the bullish party - in order to restore some technical health to the bull market.
Trading Ideas
Although the Coffee market is currently in a correction phase in the bull market, there appears to be strong support between the 130.00 and 125.00 levels. Some traders looking for support to hold in the March Coffee futures may wish to explore selling puts below this key support level. An example of such a trade would be selling the March Coffee 130.00 puts. With March Coffee trading at 142.35 as of this writing, the 130 puts could be sold for 1.90 points, or $712.50 per option, not including commissions. The premium received is the maximum potential profit on the trade, which would be realized if March Coffee is trading above 130.00 at option expiration in February. Given the potential risk involved in selling naked options, strong risk management is essential. Some traders may possibly wish to consider closing out the trade before expiration if March Coffee closes below 130.00 -- or if the price of the option moves to 3 times the premium received.
Technicals
Looking at the daily chart for March Coffee, we notice Tuesday's steep sell-off moved prices below the 20-day moving average, which is considered a sell signal for many short-term trading systems. However, prices still remain above the 100-day moving average, which is used as a bullish/bearish barometer by longer-term trend traders. In addition, the trendline drawn from the July 13th lows has not been tested since September, which keeps the bullish trend alive. The 14-day RSI has moved solidly neutral, with a current reading of 49.31. The next support point for March Coffee is seen at the 100-day moving average currently near the 137.50 area, with resistance found at the recent highs made on December 16th at 149.50.
Mike Zarembski, Senior Commodity Analyst
