Friday, May 18, 2012
Arabica Coffee's negative fundaments and the potential for aggressive hedge selling by South American producers on any significant rally may keep pressure on Coffee prices. Aggressive traders who are bearish on Coffee may wish to consider using any rally attempts to explore selling out-of-the-money calls in Coffee futures options. For example, with July Coffee trading at 179.10 as of this writing, the July Coffee 195 calls could be sold for 1.10, or $412.50 per contract, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in early June should the July futures be trading below 195.00. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of one such strategy would be to buy back the options sold prior to expiration should the July futures close above chart resistance seen at 193.00.
After a decline of over $1 per pound during the past 8 months, Arabica Coffee futures prices have begun to consolidate, hovering just north of 175.00 in the most active July contract. Like many commodities, Coffee prices have hit headwinds from the continuing drama that is Europe, as well as a much stronger U.S. Dollar. Actual Arabica Coffee fundamentals have also been a negative weight on prices, as analysts are looking for potentially record production out of Brazil this season -- which if true, would help replenish tight supplies seen the past few seasons. Many speculators, both large and small, have been holding net-short positions in Coffee futures for several weeks, but have begun to lighten-up on their short positions as prices begin to consolidate. The most recent Commitment of Traders report shows the combined net-short speculative position was decreased by just over 2,700 contracts to stand at 11,208 contracts as of May 8th. Arabica Coffee may be seeing some spillover support from Robusta Coffee futures trading in London, where bullish fundamentals, including lower exports from Vietnam, have sent prices to 8-month highs. However, any rally attempts in Arabica futures may be capped by hedge selling, as producers may take advantage of any rally to hedge what may be a record harvest in South America.
Technical Notes
Looking at the daily chart for July Coffee, we notice prices beginning to consolidate starting in the middle of March. Since that time, we have traded in a relatively narrow 20-cent price range, but have made a series of lower highs and lower lows within the recent price boundaries. The market has been trading on both sides of the 20-day moving average (MA) lately, but remains well below the longer-term 200-day MA, which is currently hovering near the 224.00 price area. The 14-day RSI has turned neutral, with a current reading of 50.30. The May 9th low of 172.20 appears to be support for July Coffee, with the April 4th high of 193.00 appearing to be the next major resistance level.
Mike Zarembski, Senior Commodity Analyst