We’ve been following the decline in the coffee market with eyes towards finding a bottom.
We tried to buy coffee futures on October 21 hoping to get long on a reversal higher off of a low volatility bottom. Our entry stop was never triggered. Coffee futures extended another leg lower and commercial traders showed renewed buying interest at the lower prices. We view their buying as supportive and will try to align ourselves with their bargain price viewpoint.
Thursday, three factors combined to provide us with a buying opportunity.
Technically, the market created a classic one bar reversal pattern. December coffee futures made a new low for the move before rebounding sharply and closing above Wednesday’s high. Fundamentally, we’ve already noted the strong commercial buying. We use their buying as a proxy for fundamental information considering that these are the producers and end line users of the commodity. The size of the multinational corporations involved in growing and processing coffee provides them with the most complete and up to date determination of value. We’ve posted the chart, here. Finally, December coffee futures tend to bottom at the end of October and rally through last trading day on December 18th. This should create additional buying through the repurchase of speculative short contracts.
Friday’s narrow range provides an easy technical entry for today’s trade. Overnight, the market has already breached Friday’s high of 104.70. Technically, this suggests the market should continue higher and the market should be bought. We expect Friday’s low of 102.85 to hold and will place our protective sell stops accordingly.
Quantitatively, this type of entry should provide a bounce of approximately 7 points over the next six trading sessions, on average.
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