Coffee is out of Favor…But

After two weeks of relentless pressure coffee futures have started to find their footing trading higher three out of the last four sessions. As of this post futures are higher by greater than 2.25%. Let’s see if bulls can hold onto these gains? In just four sessions March has advanced a nickel off the seven year lows established last week. Stochastics are starting to turn higher. The first hurdle that needs to be be overcome for momentum to shift is a penetration of the 20 day MA, identified by the red line that served as a pivot point in mid-October. Above that level is the down sloping trend line that has capped upside the prior six months. Coffee’s net short position continues to grow as futures continue to track lower but if/when prices reverse expect the rats to scurry for the exit door causing an overreaction I like to call short covering.

From a fundamental perspective the recent weather has caused a slowdown in the Vietnamese harvest…potential bullish catalyst. Brazilian coffee producers are talking about possible protests if the government cannot agree to price support measures…potential bullish catalyst. Deflated prices may cause demand to pick up…potential bullish catalyst.

Coffee Futures chart

Coffee Futures chart

My target window comes in between the 100 day MA…let’s call it $123 (light blue line) and the 38.2% Fibonacci level at $130. I have chosen to play March or May 14′ contracts for clients as I do think it could take time for this trade to develop.

Coffee Futures Trade ideas:

  • Long futures and sell out of the money call options in March or May 1:1 as a hedge.
  • Sell March put options, $110, $105 or $100 strikes depending on your risk tolerance. Remember writing naked options bears unlimited risk.

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As always, I’m here to discuss specifics and give guidance. Shoot me an email…Give me a call… you can reach me at: mbradbard@rcmam.com or 312-870-1653

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.

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