Wake Up And Smell Bullish Coffee!

| About: iPath Dow (JO)

Summary

Coffee seems to be at a critical potential bullish reversal point.

Supply/demand factors suggest higher prices.

Commercial producers are selling into an extreme two-year low, while large specs are supportive.

Coffee happy face creative commons

According to ICO (International Coffee Organization), the October rally in coffee was driven by speculation over the available supply of Robusta beans and the next Brazilian crop, with Arabica going into an off year in its biennial cycle. The Brazilian real has also been appreciating against the USD.

According to this Fortune article, it's Americans guzzling coffee that is pushing the price of the beans continually higher.

The high demand is leading to higher prices for the coffee beans. The price for Arabica-coffee futures was up 20% in June, marking the biggest monthly gain since February 2014. Arabica-coffee futures now go for about $1.4565 per pound, and Citigroup estimates that prices could reach $1.50 by the second half of 2017. Prices for Robusta coffee beans, which are used in instant coffee, are also up.

And from Bloomberg:

U.S. per capita consumption of hot coffee will be 3.1 kilograms (6.8 pounds) in 2016, up from 3 kilograms in 2015 and matching a record achieved in 2013, according to researcher Euromonitor International. Total domestic consumption will be up 1.5 percent in the 12 months that start Oct. 1 to the highest ever, the U.S. Department of Agriculture said in June. Demand in China, Japan and India will also be the most ever.

Coffee supply USDA Click to enlarge

(USDA chart from Bloomberg)

So, from a supply/demand perspective, coffee on an "oversold" level looks interesting.

The first chart below is from ICO and indicates the relationship between the different types of beans and the rising price of coffee. Robusta prices appear least volatile, but are still the source of the October rally. Options and futures data are available for both Arabica and Robusta.

Coffee bean ICO group indicators Click to enlarge

The stock chart below shows coffee trading in a "bowl" shape. To maintain this pattern, it needs to reverse up from this current level at $1.53 in the very near term and not fall to "S1". This more bullish scenario potentially creates a bullish "cup and handle" pattern (ideally with the right side of the cup being slightly higher than the left), but please note this has yet to be confirmed and is just a current speculation based on the lows of March 2015 and January 2016.

The RSI appears to be approaching an extreme oversold position, but that in itself isn't a guarantee of a low. If you check previous RSI lows, it's evident an extreme isn't necessary. In fact, the last time the RSI was extremely oversold, it wasn't a bottom at all.

The ADX and DMA appear to be bouncing from the MACD, just like the previous two dips in August and October this year, and the fast stochastic is extremely oversold. Based on previous trading, this looks like a good entry point on the buy side. A confirmation would be bullish candlesticks on the daily chart and a crossover 20 on the fast stochastic plus bullish but lagging ADX.

Coffee Click to enlarge

This Coffee COT chart is from Barchart. Major specs, swap dealers and managed money seem to be supporting the highs, while commercials and producers are on extreme lows compared to 2014.

Futures and options commitments for Robusta are published by ICE. It also publishes data for Arabica traded under the symbol "C". As expected, most commercials are short, but there's also a lot of spreading going on. It's a small market.

Coffee cot Click to enlarge

Supply/demand factors are bullish, producers have been selling into the October rally and the level seems currently more extreme than usual, with large specs soft but generally supportive.

Technically, the ADX and DMA appear to be bouncing from the MACD, just like the previous two dips in August and October this year, and the fast stochastic is extremely oversold. Based on previous trading this summer and fall, this looks like a good entry point on the buy side, but needs confirmation. That would be bullish candlesticks on the daily chart and a crossover 20 on the fast stochastic, along with a bullish rising ADX - however, the last is a lagging indicator. There is a possibility of further weakness to either of the support levels, as coffee does have a potential five-wave high pattern in place from the January low, and corrections are normally an ABC pattern. This more bearish scenario could create a bounce on the fast stochastic, followed by further downside to support level 1.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.