Bear Market Brewing in Coffee Futures?
Today's Idea
With Coffee fundamentals starting to favor the bearish camp and a potentially bearish technical formation seen on the daily charts, some traders may possibly wish to explore bearish trading strategies using Coffee futures options. For example, with March Coffee trading at 202.70 as of this writing, one could sell a January Coffee 220.00 call for about 1.50 points, or $562.50 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in December should March Coffee be trading below 220.00. As a risk management strategy, some traders may wish to close out the trade before expiration should March Coffee close above 220.00.
Fundamentals
The bull market in Coffee futures appears to have gotten a bit cold lately, as the market appears to be lacking fresh bullish news to keep the uptrend going. The harvest in Vietnam is progressing well, with analysts expecting the harvest to be nearly complete by the end of the year. In addition, Coffee exports out of India, the 3rd largest producer in Asia, are expected to reach record levels this year. The recent bull-run for Coffee was triggered partially by a second consecutive year of poor crops in Columbia and other Latin American producing countries, but now exports are up sharply compared to last year's totals. The recent revival of the U.S. Dollar has also taken its toll on commodity prices lately, and Coffee futures could see additional selling pressure should the "greenback" continue its climb higher.
Technical Notes
Looking at the daily chart for March Coffee, we notice what appears to be a head and shoulders top forming! A daily close below the “neckline” near the 199.00 area would add credence to this bearish formation. Prices have fallen below the 20-day moving average, triggering some fresh selling by short-term momentum traders. The 14-day RSI has turned neutral, with a current reading of 49.13. 191.25 is seen as the next major support point for March Coffee, with resistance seen at the recent highs near the 213.25 area.
Mike Zarembski, Senior Commodity Analyst
