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Update Roadmap For Coffee Futures
On January 21 I posted what I believed to be the possible roadmap for Coffee Futures along with a monthly chart. I believed prices might unroll as follows:
Recapping,
- Rally to start end of month
- Target at least $3.00 by early March maybe higher
- Largest correction at least 40 cents to last around 3 weeks
- Final parabolic rally to end in early May possible target $6-7.00
The rally did start January 28 to marginal new highs and since then we have has a 50 cent correction lasting 23 trading days if the low at $2.10 sticks.
So what now? There is no analog year to lean against so no guessing. There is however an abundance of technical and fundamental information that I am weighing to determine the next probable direction.
First I am weighting the monthly chart as 90% most important. As we can see from the chart 2 extremely important trend lines exist one at $2.95 we can forget about that 1 for the time being. The 2nd one is in the 2.10-2.15 area (I have checked it more precisely on an actual chart) This area represents the 2014 high, the frost high in July, plus 2 previously historical highs. Reviewing the price action we had a breakout above this level
In Mid November with a first run to 2.55 we retraced to 2.20 and then completed another run to 2.60 before a correction to 2.10 last week. We could easily label this as 5 month consolidation and a retest of the breakout level. We also have to recognize that the bullish sentiment was quite frothy, myself included. Consolidations job is to reset the sentiment. This has been achieved. Coffee is actually the worst performing agricultural commodity year to date. Now a breakout level can be retested however if there is a failure it has to be respected. Extended trading below the breakout level would indicate such a failure.
With regard to the fundamentals beginning with the bearish ones. Loss of Russia / Ukraine demand. Yes there probably is some loss of demand from this region and while it’s very difficult to quantify it doesn’t turn the supply/ demand balance from deficit to surplus. World enters a recession and coffee demand demand drops I think the Covid years have shown that it takes a lot to reduce the consumer’s desire for coffee and honestly coffee remains very cheap compared to other grocery staples.
The bull factors are many. The 2 years Brazilian Arabica deficit is 22 mln bags compared with the previous 2 years. Consumption growth is resuming as Covid suspended activities resume. Inventories will be drawn down to very low levels this year with another reduced crop still ahead. Certified stocks are on the low end.Large improvement and trend change in the Brazilian Real reducing prices to producers. Huge increases in fertilizer prices and energy to have a large impact on production costs and 3rd world production. Continuation of La Niña already resulting in a very dry 30 days and keeping the possibility of frost on the table.
Generally speaking the fundamentals are quite positive. It is very unusual to have back to back deficits so it makes it more difficult to know when the situation has been properly discounted. It seems to me that we still have a lot of trading ahead of us in the next 12 months with the potential for a black swan event. I’m interested in staying long as long the monthly breakout level is respected and still believe that this is a generational trade and that all time highs will be surpassed. You already know I can be wrong!
Good Luck!
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