#$cafe

[valiantuniversityprofessorwombat]

Make your Own Cafe Display with PHP

[jeffhirsch]

Will Coffee buzz fade this summer?

Coffee typically posts a seasonal high in May. This creates coffee’s most powerful seasonal play under normal weather conditions, which means a lack of frost in the Southern Hemisphere growing regions of Columbia and Brazil. Traders should look to sell short on or about May 23 and hold through August 9 (shaded yellow in chart below). This trade has worked 30 out of last 42 years for a 71.4% success rate.

This trade did not fare so well in 2006, 2007, and 2010. An explanation as to why this market defied the seasonal tendency to decline in this time period was that there was a lack of rain during the key flower pollination stage, resulting in a much smaller crop than expected in Brazil back in 2007. Estimates were looking for 50 million bags of production, but that estimate backed down to 45 million bags of production. So in essence, supply declined due to poor weather conditions as demand remained steady. Tight supplies and a falling dollar supported coffee in 2010 through early 2011.

[allstarcharts]

Coffee Is Ready To Wake Up

Coffee has been a market that has struggled to get going since hitting fresh multi-year highs last Fall. Prices have come down and, so far, successfully retested key support from the 61.8% Fibonacci retracement of the entire 2014 rally. Here is a daily candlestick chart showing this level right around $160.

As long as prices remain above that important support level, we want to lean on the bullish side with the first target up near $185 and bigger picture targets well above $200.

Seasonally the first 100 days of the year are historically the most bullish period for Coffee. I think the fact that prices held in so well this week signals to us that Coffee is finally ready to participate in what is traditionally a bullish period.

Risk management-wise, which is the most important thing to us, we don't want to be long below this year's lows. That makes the risk/reward very much favored on the side of the bulls.

The futures $KC_F and ETF $JO are likely to benefit the most form higher coffee prices.

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[jeffhirsch]

Why further coffee price gains are likely

As featured in the Commodity Trader’s Almanac 2013, coffee typically tends to start a seasonal bottoming process before distributors begin buying ahead of anticipated demand in the upcoming cold winter months. This is the time to cover the best seasonal trade short position from May. It is also a time to look for a short-term trade opportunity on the long side. Traders can look to enter a new long position on or about August 18 and hold this position until about September 5. The trade usually ends right around Labor Day, but coffee prices can continue to head higher as illustrated by the yellow shading in the one-year seasonal pattern below. This trade has worked 26 times in the last 40 years, for a success rate of 65.0%. After posting a gain every year from 1986 to 1997, this trade has had a spotty record of late, successful in just eight of the last 16 years. 

Coffee has increased in popularity on an international scale in the last few decades. Most consumption has been from the United States, parts of Europe, and Canada. Many Europeans have switched from tea to coffee and with the introduction in late 2005 of Starbucks coffee in Europe and in Asia. Demand is improving, especially for higher grade and quality coffee. With increasing global consumption habits, if there are threats of supply disruptions or production declines for higher grade coffee, the futures market can be prone to extreme price moves. One such move was earlier this year when coffee surged nearly 100% in about three months due to drought conditions in the major producing areas in Brazil. These conditions have not completely eased and production and quality are projected to suffer this year and possibly even beyond which should set a floor under coffee prices for some time to come.