The coffee market has always been one of the speculative stars of the futures’ markets. This is due to the large contract size of 37,500 pounds and this market’s typical volatility. Even at the currently depressed prices and low volatility, the average range is still more than $1,300 per contract, per day. This market is famous for its fast, giant swings and the associated sums of money made or lost. Fortunately, the recent decline in coffee’s volatility comes at a time when commercial long hedgers, the coffee roasters, are laying in stores for future production. Their buying serves as a proxy for fundamental data and valuations. While we can’t afford to hold positions the way hedgers do, we can put the leverage of their hedges to work for our own speculative purposes.
This shortened holiday week began with our piece for Equities.com on the coffee futures market and the peculiarities of Coffee Futures Expiration Analysis. We discussed the roll from the July to December contract and the effect we thought it would have on the market as it made new highs for the move.
Our primary piece this week focused on the Live Cattle futures market and the spread between the expiring October and newly liquid December contracts. We noted the difference in the change in open interest and depth of decline between the two contract months and predicted, “One More All-Time High Coming in Cattle.” We also noted the similarities in the technical setup between the current live cattle situation and the False Breakout in Gold and Silver that we wrote about in July. The more often we see the same patterns reflect the same outcomes the easier they are to recognize going forward.
Lastly, the European Central Bank cut their interest rates and moved the overnight rate to negative. This is the same type of Quantitative Easing that our Federal Reserve has used over the last few years to pump money into a deflating economy. This move caught many traders off guard, but we wrote about it last week in, “Hand Quantitative Easing to Germany” as well as discussing how the US can use this our advantage.
Have a wonderful weekend and we’ll be back bright and early Monday morning with a new piece for TraderPlanet.
Sincerely, Andy Waldock.
Commercial coffee traders take advantage of speculative short covering in the July contract to create new short hedges in the December contract. The strength of their selling clearly states that coffee farmers are thrilled to sell their crops at these prices thus, hedging their forward risk.
This is a very similar setup to the False Breakout in Gold and Silver. These are examples of why we track the weekly CFTC Commitment of Traders reports as we have determined that their actions, based on their fundamental sense of value in their own markets are the most consistent predictors of future market movement. Find out more and register for a free 30 day trial at COTSignals.
See the rest of our Coffee Futures Expiration Analysis for Equities.com