Is a Bullish Price Advance Brewing in Coffee?
Monday, October 24, 2011
Friday's upside breakout may signal that Coffee prices are ready to resume their move higher. The lows of the recent consolidation near 220.00 may be signaling a near-term bottom is in place. Some aggressive traders who are expecting the recent lows to hold may possibly wish to explore selling out-of-the-money puts in Coffee futures options with a strike price below support at 220.00. For example, with December Coffee trading at 244.00 as of this writing, the December Coffee 210 puts could be sold for about 1.00, or $375 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at options expiration in mid-November should December Coffee be trading above 210.00.
Fundamentals
After watching Coffee futures prices consolidate for most of the month of October, it appears that Coffee bulls are beginning to flex their muscles, as prices appear poised to break out to the upside. Coffee, like most commodity markets, was being held captive buy the continued uncertainty regarding a solution, or at least some consensus on a plan to deal with the European debt crisis. This uncertainty has made commodity prices quite volatile, as conflicting reports on progress on the debt plan seemed to trigger movement into or out of the commodity sector without regard to the underlying fundamentals facing any specific market. For the Coffee market, the fundamentals seem to be leaning toward the bullish camp in the near-term, as weather forecasters calling for a "La Nina" event, which could affect Coffee production out of Columbia, which has struggled with its production the past few years due to heavy rains and flooding. Tight Coffee supplies in Asia have been supporting Coffee prices lately, and news of flooding in Vietnam, which is the world's largest Robusta Coffee producer, has affected Coffee shipments out of the country. Central American producers are also seeing heavy rains begin to affect the Coffee harvest, which may keep near-term supplies tight. However, should EU leaders once again fail to come up with an acceptable debt plan, Coffee prices and commodity prices may tumble once again, as traders' fears of a global recession return the forefront.
Technical Notes
Looking at the daily chart for December Coffee, we notice prices trading near the highs of the recent price consolidation. Friday's strong upward move has put prices well above the 20-day moving average, adding to the short-term bullish momentum. The 14-day RSI has turned upward, with a current reading of 53.46. Coffee bulls still face some upward resistance at the September 21st low of 251.35, and again at the 200-day moving average, which is currently near the 262.75 area.
Mike Zarembski, Senior Commodity Analyst
