A few weeks ago I made a bullish case for Arabica coffee based solely on the technical aspects of this particular market. From a fundamental perspective, Arabica coffee remains decidedly bearish. Despite devastating flooding in Vietnam this past weekend, which mostly affected Robusta coffee plantations, it does not have any obviously bullish tailwinds.
The market sentiment was best summed up in Bloomberg last week by a broker in Brazil:
“There’s so much coffee around, all over, that it will take at least one year and a half for supplies to diminish and prices to start rebounding,” said Roberto Higgins, a director at Guide Investimentos SA Corretora de Valores, a broker in Sao Paulo. “There’s nothing bullish in this market.”
Despite the bears, the market may be setting up for a bullish breakout this week.
On the daily chart $KC_F the front-month coffee contract has consolidated after touching a low of around $1 per pound hit on November 7, bouncing between multi-year support and resistance at $1.06.
In the March 2014 contract, prices appear more bullish. Holding a premium of about four to five cents above the December contract, March registered a new November high close at $1.0955 today, briefly touching above $1.10.
If the March contract can extend its winning streak and close above resistance at $1.10, the market may attract more technical buying and short covering, propelling the market into the teens. A failed breakout will allow the market to test the multi-year low set a few weeks prior.
I’m betting that the market will break out this week, but I’m not confident, as an increase in volume has not accompanied the two-day rise. Midweek is looking like a make-or-break period for coffee prices.
Full Disclosure: I’m long coffee.