The DeCarley Perspective Trading Newsletter

Coffee...people still drink it, avoid the short side?

This newsletter was emailed to DeCarley Trading clients on December 7, 2011

The DeCarley Perspective newsletter

Thank you for choosing DeCarley Trading.  We are proud to offer the DeCarley Perspective as an informational guide to our clients and subscribers.  We hope that you walk away from the newsletter with a better understanding of market fundamentals, as well as technical and seasonal factors. 

**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

  • Coffee...people still drink it, avoid the short side?

Coffee

Like other commodities, coffee prices have suffered at the hands of fund liquidation amidst the European debt crisis, a stronger U.S. dollar, and supply concerns.  However, as we suspect will be the case with similarly produced commodities, it appears as though all of the bad news might be out.  In other words, the market has already accounted for better than expected production and a sagging global economy but, in the case of coffee, perhaps it hasn't priced in the possibility of weather issues in the upcoming Vietnam crop, or an improving macro-economic climate.  Assuming either of these events begin to emerge, coffee prices could be off to the races.  Besides, coffee is an extremely inelastic product...regardless of economic activity people demand is always "robusta" (pardon the pun).

Large speculators have been net long coffee for as long as I can remember; nonetheless, they are less net long now than they have been for much of the last three years (or maybe even longer).  Some might look at this as a signal that the "smart money" lacks confidence but the truth of the matter is, if you wait for the large specs to get substantially long you've missed the move.  Even worse, being a bull at that point entails running the risk of getting in just as the "smart money" is getting out (market sells off). 

We see near term resistance in March coffee near 245 but a break (and hold) above this level could lead to a quick buying frenzy into the 270 (and maybe even 280) area.  If we are wrong, a break of support would lead to a fall-out into the 213 area (and maybe as low as 206).

Overall market volatility in coffee has been tremendously low in recent weeks and those that have ever traded coffee realize quiet doesn't last.  Although we are inclined to believe volatility will resolve itself on the upside we wouldn't bet the farm.  A breach of support could trigger stop loss orders to send the market temporarily reeling.  Accordingly,   going long futures contracts or selling puts might not be the ideal strategy.  Instead, traders could look for cheap out of the money calls using the March options (such as the 285's or the 290's which are both under $400).  In the case of a sell-off to noted support levels traders might want to consider getting a little more aggressive (short puts or long futures).

 Coffee Futures Trading Chart

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**There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

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