There’s an old saying that goes something like, “when its easy to own something, you probably don’t want to.”  Well, anyone in coffee futures right now is probably feeling as uneasy as I do.  Cocoa and Sugar futures have had a phenomenal year on arguably weaker fundamentals.  But they did have a story and perhaps their time was due.  Coffee futures meanwhile have had a hell of a time making it to and maintaining our current trading range in the $1.35 to $1.50 area.  This, needless to say, is discouraging.  However…

I want you to take a look at the coffee price chart from 2008 before coffee futures ran to the highest prices in 10 years.  Comparing our current setup at our current time of year in 2010 to that in 2008, we’re looking at a nearly identical technical setup.  Prices were range bound for almost 2 months into the end of January.  You’ll notice futures prices bottomed around the 25th of January and from there climbed steadily for 30 days.  What’s more important is that that run up was preceded by bearish divergence on the MACD histogram, which, as I mentioned before, has a strong track record for fortelling major turns in this market.  It was wrong then, which is indicative of exceedingly strong fundamental factors. 

In mid December of 2009 the MACD Histogram flashed bearish divergence and prices corrected down to around $1.35.  If we can see coffee prices hold and/or correct at these current levels in the upper $1.30’s, both the MACD histogram (plotted on bottom) and the Relative Strength Index (plotted with prices on top) will give a strong buy signal, that is, this valley will be shallower than the last for both indicators.  All commodities were adorned in red today thanks to our paradoxically strong dollar, but should that fail to maintain its strength, then coffee futures have a great many bullish influences.

To recap from the previous post, we are in the most bullish time frame of the year for coffee futures.  We are at the longest period of time between major harvests contributed by Brazil and Vietnam, and what would normally provide some alleviation to tightness, Columbia, is experiencing severe losses this year due to weather.  Ice certified stocks are the lowest in 7 years, and the stocks relative to global consumption are the lowest in 30 years.  And…technicals could be turning very bullish here before week end.  It’s time to be long this market, and at these levels one can enter with strong fundamental and technical support.  And if you’re not long, you don’t want to be short.

Here at the close of March 9, 2009, we find coffee futures at the edge of a precipice yet again.  For a coffee bull, this setup has fooled us twice already within the last 5 months.  It occurred before the all out collapse in futures prices in October, and it occurred again at the market lows in December.  And here we are again. 

For those new to the mind numbing art of technical analysis, this chart may not look like anything useful to you, and alas, you might be right.  Time will tell.  But it does show us my two favorite technical indicators for the coffee futures market.  The indicator on top, which is accompanying the daily price bars is called the Relative Strength Index, or RSI.  The one on the bottom is called the MACD Histogram.  For those interested in knowing how these are calculated, or what exactly they indicate, I highly recommend buying, reading, and rereading A. Elder’s Book ‘Trading for a Living’, or simply drop me a question.

Both of these technical indicators scream the same thing as of today, that the market has hit an intermediate to a longer term bottom.  This comes at a time when the previous market low of $1.05 was tested, broken, and eventually held by day end.  And it comes at a time when commercial interest is heavily supporting the market, as can be seen in the COT chart from my previous coffee futures post.  From a technical perspective, it is hard to find a better, low risk opportunity to enter a market.  All indicators are flashing go, and you can enter with a tight stop loss, risking less than $1,000 dollars to test the entry, as the stop loss can be place just under today’s low at $1.0425. 

Again, these indicators over the last 5 years have been over 80 percent accurate when used together…until the end of 2008, when all indicators became worthless and fear plagued the markets.  Can we trust them again, or are coffee futures still under external market pressures?  I’m keeping my fingers crossed and entering here with a small position, long one may coffee future, and hedging with one may $1.05 coffee put option.  For those puzzled over my addiction to coffee futures, you can read why they are the best investment for 2009 and 1010.