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The market is certainly overbought and weakness from outside markets could spark a temporary correction but breaks still look like buying opportunities as the period of most uncertainty for Brazil weather lies ahead. With the smaller “off” season production in Brazil this season, traders see a significant world production deficit and the stocks situation at many producing countries is still relatively tight. After closing higher in 7 of the previous 8 trading sessions, July coffee closed lower yesterday with pressure from outside market forces and talk of the overbought condition. Slow news in cash circles along with a lack of new buying interest in futures after moving to the highest level since September on the rally this week helped to pressure the market and spark some light long liquidation selling from speculators. A continued steady decline in exchange stocks and strong export premiums from Colombia helped to provide some underlying support. Colombia officials indicate that they have coffee to meet their commitments. The USDA attache in Colombia believes production for the 08/09 season will slip by 1.3 million bags and that exports will fall 556,000 bags from last year due to the smaller crop. The region has seen historically high premiums paid in the cash market which has provided underlying support. Costa Rica coffee production for the 08/09 season came in at 1.595 million bags, down 15% from the previous year. Funds have been active buyers in the past week and the market is technically overbought but the stiff discount of futures to some cash markets and a steady decline in exchange stocks should help provide underlying support on technical corrections. Exchange stocks were down 3,075 bags to 3.796 million with 7,400 bags pending review.
TODAY’S GUIDANCE: It may take more than a one-day set back to correct the overbought condition. Buying support for September coffee comes in at 125.85 with 135.50 and 136.90 as next upside targets.
