This market suckers me every January.  Coffee futures take a spill after new year and look weak until the end of January.  This seasonal down swing lasted a bit longer than usual, but here we are.  There are some major considerations we need to weigh at this juncture.  The first is that we’re entering the second of coffee’s two seasonal bullish timeframes.  The first is November into December.  This generally means that speculation of the size of the coming crop is factored in, and we need to deal with the gap in supply until it comes to market. 

The second major consideration is that coffee futures look weak as hell.  They broke the intermediate term upward trendline, implying a change of trend.  And they broke support more than once.  This is pretty severe considering the abundance of bullish news out there and the time of year.  So we need to ask ourselves, if this market is in fact in a dire situation fundamentally, why are prices so weak?  Why were coffee futures unable to remain in the previous range in the $1.40’s? 

In the previous post Commodity Investment Strategies to Supplement Your Coffee Futures Trading, I discussed long term strategies for profiting from the coming coffee futures bull market.  But that won’t help too many of you that are trying to make money in the next couple of months, and likewise, looking to retain equity in the next few months despite unexpected corrections.  So let’s examine a few short term strategies for coffee futures trading.

Looking at this coffee futures chart, we can see that coffee has fallen to the $1.30 range, and it seems to be turning up.  Based on the fact that the MACD Histogram is turning up and showing bullish divergence, and the fact that coffee is in a seasonally bullish time frame, it’d be smart not to be short at present.  One of the best ways to play is covered in the last post under ‘writing options’.  In this case, you’d be wise to sell puts, as coffee futures ought to at least have support at these levels.

For futures traders, there are two strategies I’d recommend for coffee futures trading.  The first is simple, go long at the market and place a 5 cent stop loss.  It’s rare to get bullish divergence and seasonality to line up, all at levels that previously acted as strong support.  We’re less than 5 cents from the lows, so this is a pretty safe entry point to give this market a shot.  The other coffee futures trading strategy I’d recommend would be to place a buy-stop above the previous highs at $1.50 and simply wait.  If this market is going to go, it’ll need to breach that resistance level.  If it breaches that resistance, it ought to have the momentum to carry on in a meaningful way.

My approach here, which admittedly is a bit unorthodox, is to buy in-the-money calls for May or July.  This is a strict no no for most options traders, but I couldn’t care less.  When you find a market that has real potential for a run, you don’t want to get shaken out.  A call option will allow me to ride out further corrections without losing my position.  I’ll be able to be in the market immediately, and won’t have to wait for a breakout. 

If coffee futures run up 30 to 40 cents, I’ll convert my call option to the underlying contract, and be long 1 futures.  At this point I’ll follow the market up with a stop loss.  If at that time I suspect further gains, I’ll pyramid the position and add 1 coffee futures contract for every 3 I own at that time using the equity gained from the previous move.  This is a combination of an options investing strategy and a coffee futures trading strategy that seems to offer the best of both worlds.