Will the Price of Your Morning Joe Drop?
Tuesday, July 26, 2011
Coffee is a prime example of a market that has gotten way ahead of itself, as many traders seem to have taken the idea that new crop Coffee would have the same supply-side issues as old crop Coffee and run with it. The current crop, barring weather issues, will likely alleviate any remaining supply tightness. Technically, it looks as though the December Coffee contract is close to confirming a head and shoulders top pattern. Despite these seemingly ominous signs, the current supply situation could make the bulls spring into action quickly if any crop damage is seen. For this reason, some traders may possible want to take a longer-term approach with limited risk, such as a bear put spread. For example, some traders may wish to consider buying the December Coffee 225 puts and selling the December 200 puts for a debit of 6.00, or $2,250. The trade risks the initial cost and has a maximum profit of $7,125 if the price of the December Coffee futures close below 200.00 at expiration.
Fundamentals
Coffee futures have gone from a high-flying commodity to a laggard over the course of several months. Expectations of tight crops have now given way to what is anticipated to be a record crop in India. This is the tail end of the Coffee frost season in Brazil, and barring the unforeseen, we could see a very large Brazilian crop. While the future looks as though supplies are going to loosen-up considerably, the current cash market in Coffee remains extremely tight. Many exporters could be tempted to take advantage of the relatively high price of Coffee and begin selling their reserve stocks. This could have an extremely bullish effect on the market if current crops see inclement growing weather. The market may find positive price support from a weaker US Dollar, especially if no deal is reached during the current debt ceiling impasse.
Technical Notes
Turning to the chart, we see the price of December Coffee steadily falling since May. It looks as though the December chart is showing the makings of a head and shoulders top with a sloping neckline. A downward breakout from the pattern could result in prices falling well below the 200.00 mark. Currently, there is a band of price support just north of the 225.00 level, but more substantial support does not come in until 190.00. The market is currently trading below the three major moving averages, and prices will likely have to convincingly close above the averages to gain upward momentum. The RSI is currently at oversold levels, which could provide some relief for the Coffee market.
Rob Kurzatkowski, Senior Commodity Analyst
