Caffeine Rush Over?

Fundamentals

Coffee futures may have risen too much, too quickly for many traders' liking, which could make the commodity ripe for profit taking pressure. Whether or not the market will see sustained selling pressure is another matter. The primary force behind the sharp rise in prices has been the extremely tight supply situation and deliverable stocks continue to fall. Another market force behind the rally was panic short covering. This may have caused prices to rally a bit more than they would have otherwise, suggesting some longs may be content taking profits at current levels. The extremely bullish fundamentals may prevent new shorts from entering the market. For this reason, traders may wish to tread lightly if they decide to test the waters on the short side. Higher quality beans have been fetching attractive premiums, indicating the cash market and demand remain very strong.

Trading Ideas

Given the strong fundamentals and lack of some sort of topping signal, investors may wish to remain long the Coffee market. Traders wishing to be short the Coffee market may wish to employ some sort of put spread strategy. Shorting the futures contract could be haphazard and outright put premiums are a bit expensive at the moment. Even though the market may have rallied too quickly in many traders eyes, markets can remain irrational far longer than traders can remain solvent.

Technicals

Turning to the chart, the September contract shows no signs of topping at the moment. A close below the 160.00 level could change that. A violation of the 160.00 level could shake some freshly established longs out of the market and could stop others out. Despite the early weakness in the Coffee market this morning, the momentum indicator has not dropped to as great of a degree as prices and the RSI indicator, hinting at sustained strength.

Mike Zarembski, Senior Commodity Analyst