Coffee – the anatomy of a pretty trade

Arabica Coffee Futures (current forward contract) Price Chart
Arabica Coffee Futures (current forward contract) Price Chart

Rob Zdravevski

Rob Zdravevski

Global Investment Advisor at Karri Asset Advisors

July 31, 2020

By Rob Zdravevski

The price of Arabica Coffee is setting up and acting is a very constructive manner to suggest rising probability of notably higher prices.

By no means is this meant to be a comprehensive lesson but I’d like point out some signals (see attached headline chart) which have lead to this call of rising coffee prices.

Firstly, note the vertical yellow line highlighting July 17th, 2020.

On this day, Coffee moved from its meandering price of 98 to close at 102 and technically speaking, it broke above a descending trend line.

Furthermore, ALL AT THE SAME TIME (throughout the July 17th trading day) my specific moving averages “crossed” upwards, the Directional Movement Index (DMI) turned positive (incidentally its strength indicator “blue line” was positioned optimally) and the MACD and its Stochastic Oscillator crossed positively.

But the real “set-up” was in the prior 6 weeks.

From the beginning of June, the price of Coffee ($0.96) registered an oversold reading whilst simultaneously trading at 2 standard deviations below its daily mean. The Stochastic’s were at a matching nadir.

The price of Coffee then proceeded to “digest” and consolidate its decline from its April’s $1.30 high and traded sideways into mid-June. It did so whilst “down” volume was increasing and remained robust – yet it failed to register a subsequent oversold RSI reading.

In other words, it “hung tough”.

Now back to today’s price and action.

Coffee traded up to $1.174 last night, closing at $1.154.

It has risen 14% in the past 2 weeks.

It’s now overbought and extended as referenced by the circles on the RSI and MACD, while the circle on the price chart shows its daily mean is approx. $1.03

The advance is now due for a rest and some price reversion.

So, I am setting up to Buy the Coffee “C” futures contract at $1.06 and $1.03.

Why ?

These technical indicators are also being mimicked by my Weekly indicators and bode well for a longer and stronger rising trend.

Subjectively, coffee has seen a supply/demand distortion, mainly through supply disruption coupled with shipping/delivery constraints. The demand equation has stayed relatively steady, as bean consumption has been distributed from the cafes to the home.

The upside argument is that overall demand will rise once visitation to cafes resembles some sort of normality.

As far as equities are concerned, I’m not sure that the likes of Nestle will be able to pass on rising coffee prices in what seems to be a deflationary environment. This may stifle margins amongst those companies but that’s a different pile of research to conduct.

Incidentally, Cocoa has some similar technical pricing traits to that of Coffee.

This is not personal advice. Please see my disclaimer.

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