Well, your perennial coffee futures bull is a tad lost for direction. It’s been a while since the last post, and for good reason. I haven’t seen anything worth commenting on. Coffee futures seem to have put in a solid bottom, and are looking now for confirmation. But the fundamental picture is not what it was a couple months ago.

The size of the Brazilian harvest was more than ample, and considering this is an off-year it certainly is cause for concern over the potential size of next year’s on-year crop. The spark which lit the fire under coffee futures prices back in April has fizzled, as Columbian premiums are dropping and the wait for new supply is rapidly decreasing, alleviating concern for deficit.

I usually post with a purpose, to elucidate trading principles in the context of coffee futures trading, or to update fundamental or technical developments. This post is different, but perhaps it can stand as a lesson of its own. The lesson is this; when things which were previous clear to you become blurred, its time to stand aside.

It’s a difficult thing to believe in an impending bull run in coffee futures and to find yourself temporarily in uncertainty, but it happens sometimes. My natural inclination is to persist, and continue to try to work my initial plan as at one time it made perfect sense. My natural inclination is rarely correct. This is why it is of the utmost importance to define your signals, signals which you understand and which show a base of reliability, and only trade on the basis of those signals.

The downside is you are going to miss important events because markets don’t always conform to market indicators. Coffee futures couldn’t care less how I intend to analyze them, nor do the thousands of players involved in making a single trade at a single price. This never seems to change the fact that we all have that ‘lucky’ feeling that tells us the market cares about us, and that it intends to pay us out this month.

Coffee futures and fundamentals are sending mixed messages at present. This is the ideal time for a seasonal low, and that low no doubt was set in July. Seasonality dictates that we ought to see oscillating prices with an upward trend into December. The strength of the upward trend is contingent on crop outlook, dollar value, and investor demand. We aren’t due for another massive Arabica crop for 9 months or so and that generally underpins prices this time of year. This is generally bullish.

Futher bullish signals include COT funds increasing longs, which portends a longer term upward trend, global economic news is improving, global coffee consumption is increasing, and investment demand should return in droves to commodities. Before long inflationary pressures should grip commodities again, at least those which have supportive fundamental conditions, and push them to all time highs. That’s what we’re presently observing in Sugar futures, which are at their highest prices in 30 years despite the fact that fundamentals are fuzzy.

On the negative side, the weight of this year’s Arabica harvest may weigh heavily on coffee futures, as next years harvest is predicted to be massive. If these two crops have the potential to increase global stocks then coffee futures have little hope of rallying significantly. This is very discouraging to someone who just put up a website on the inevitable coffee Bull Run, but we have to adapt. Price may still rally on the basis of seasonality alone, but I’m not finding a clear technical or fundamental picture with which to trade. I’ll stand aside for a short time.

Ways in which to profit from this uncertainty may be to sell out of the money coffee call or put options. Selling these is in essence, selling hope to someone that believes coffee futures prices are going to move sharply up or down. This seems unlikely in the short term, and selling calls or puts may be a promising strategy. I’d be more inclined to sell puts at present, as the coffee futures generally don’t surpass the July lows. We’re not far from the previous lows here, so this lends some safety to the equation. But before selling coffee futures options, make sure you do your own homework. Coffee futures are extremely volatile, and selling hope means you’re also accountable for potential losses.