COT Report – Coffee Sellers Ahead of Seasonal Weakness

Coffee futures have been trending lower since October of last year. As always, coffee trends are anything but smooth as seen by the spikes in the included chart. Whether these spikes washed out short positions or simply forced them through some pain is not the point of these spikes. Today’s point is how to use these spikes, like the current one, to initiate new short positions inline with the commercial traders. Hopefully, this avoids being stopped out or having to endure too much pain while still participating in the opportunities that trading coffee futures presents.

Like many of the commodity markets, coffee futures’ decline has been deep enough and protracted enough to bring the market back down to fundamental value prices. This is the lowest coffee futures have been since November of 2013 when the $1 per/lb last supported prices. Prior to that, we have to go all the way back to 2008. This broad pattern of multi-year cyclicality shows up well in the long-term net commercial position chart. Over the long haul, commercial coffee growers have been big sellers above $1.50 per/lb while coffee grinders have been big buyers near $1 per/lb. Putting this in perspective, commercial traders set a net long record during the November of ’13 decline, long nearly 23k contract. Therefore, the current net position levels long between 14k-21k are extremely important.

Given that there is little impetus for the coffee market to begin a new upwards trend we believe that commercial growers will once again begin selling their forward contracts on any type of rally the market can muster. They need to get their crop hedged ahead of expected seasonal weakness. Their selling will only add to the building technical resistance. Therefore, we’re looking to sell May coffee futures inline with the existing downward trend. We’re watching closely for a reversal lower which will trigger our short entry and provide us with a point to place our protective buy stop once the short position is initiated.

Commercial traders have fulfilled their buying capacity short of overhead resistance. This is a clear indication of selling to follow.
Commercial traders have fulfilled their buying capacity short of overhead resistance. This is a clear indication of selling to follow.

Finally, we’ll take a long-term look at the coffee futures as the May contract comes closer to expiration and April brings us some seasonal strength. Until then, we’ll continue to bet on the, “don’t” as trends continue longer than we can predict and market spikes fade to new lows while squashing the hopes of bottom pickers everywhere. Feel free to join us for a 30-day free trial and receive the actual COT sell signal by email along with the protective stop point once the market reverses and the trade is generated.

This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

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