April 9, 2020
COFFEE, COFFEE, COFFEE ONCE AGAIN
As some of you may recall Coffee is one of my favorite markets if not my absolute favorite market. In the past I have enjoyed writing articles regarding Coffee and I get pretty good number of folks reading my articles on Coffee so let’s ride that horse again.
From March 17 to the 26th the Coffee market enjoyed a nice blast higher. I wish I could tell you about how successful I was and how much money I made but alas I cannot. There is a valuable lesson to be learned in my financial loss that may be worth sharing. About early March I was feeling good about the long side of the Coffee market and my model was starting to suggest the same. I studied all the indicators in preparation of what I thought would be a solid opportunity and then I made a critical error……I outsmarted myself. Thinking that I could front run my model I got long Coffee just about the time it made the last leg lower. Luckily I was able to hold on long enough to recoup most of my loss but I missed the higher move as the March Coffee went off the board. Object of the story, do not out think yourself.
So what does the model tell us about May Coffee at this time?
Well if you received my weekend letter “Trends and Reversals” you know May Coffee is one of the unusual commodities to be in a long term uptrend. It reversed from bearish to bullish on the weekly close March 27. You would also know that it will take a close this Friday (all my work uses weekly closes) at or below $103.15 to revert back to bearish. While possible it is my opinion not likely. You would also know that on the close the RSI was 49. It should be noted while I do not use the RSI to determine which stage a market may be in I do refer to it because it is the one index I believe most traders are familiar with. My in-house model showed the Positive and Negative indicators to be within the first standard deviation of the long term average. This tells us that for at least the present time Coffee may have achieved Price Equilibrium. Looking ahead it is my opinion that there is a good chance that Coffee will remain within Price Equilibrium to higher for the next two weeks.
The fundamentals while not wildly bullish appear to be fairly supportive. We know that supplies of higher grade Coffee may be a bit tight. We know that production is down in key areas, and social distancing has slowed shipments from some exporters. It was apparent to me upon visiting my local grocery store that Coffee is being consumed, maybe not at Starbucks but at home.
So what to do?
Since according to my model May Coffee is in an uptrend I will favor trading from the long side. As long as we remain in Price Equilibrium I would be looking to buying at support levels. Depending on your risk tolerance May Coffee has support starting at $115.00, and then $114.00 and lastly $112.50 pick your poison. I think it is necessary to understand that if one buys $115.00 or $114.00, one is willing to risk something below $112.50, if not stay out. It is my opinion that the resistance (profit taking levels) start at $120.00, then 123.00, then 129.00, pick your poison. I strongly advise you to use stop loss orders. Given current conditions with Covid-19 one must be prepared in case there is yet another unforeseen shoe to drop.
My name is Lee Gaus and if you would like to see more of our thoughts go to our website ifgfutures.com. There you will also find articles written by my partners Tom Fritz, Steve Erdman. If you have any questions you can reach me at 1-877-304-1369, 312-384-1166, or email me atlee@efggrp.com. If there is a commodity you would like me to address shoot me an email.
There is significant risk involved in trading futures and/or options on futures. Futures and/or options of futures trading may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions. Past performance is not indicative of future results.