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Cup o' coffee anyone?

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I was watching a TV series called "This Giant Beast That is the Global Economy " starring and narrated by Kal Penn, actor in "House" and speech writer with Obama.  It doesn't really cover any new concepts, although there were a few interesting observation in their, like what the most important commodity in the global economy is... (I wont spoil it for anyone who hasn't seen it yet and wants to but it was not that obvious and is blindingly obvious in retrospect).

One thing that did pop out that I though was relevant for the forum was that the price of coffee is way too low for farmers to make money.  The logical conclusion of this is that they will farm something else and supply will be curtailed and then prices will go up, the basic perpetual cycle of supply and demand change.  This very basic fundamentals proposition motivated me to look at coffee on the charts to see if there was a building opportunity and I think there may be.  I will preface my analytical assessment with the statement that I know very little about the coffee industry other than how to select a great bean type as a consumer and make a great flat white.

If I look at the long term charts (Quarterly/Monthly) I see that coffee trades in a large range from about 4000 to 34000 at the extremes (or $0.40 - $3.40 per US pound if you prefer).  This seems to represent the classic economics supply and demand curve in candle pricing form.  With the available data we can see a set of cycles between the market top and bottom zones that in the main run fairly directly between the zones.  At this point my thesis would be that if you catch the market right at either extreme you can hold until price reaches the opposite end of the range (net 30,000 points or so).  For best results you want a straight run rather than one with large reversals.

If I apply EWT to the chart I see a series of 1-5s and A-B-C, although this is arguably less relevant than for markets that do not operate between such obvious ranges as the key is obviously to look at trading when the market enters, or more correctly, then exits the range extremes zones.  Still it is interesting to see that the run up in the mid 70s was a motive 1-5 that still marks the high point in price.  After that I see a series of massive A-B-Cs culminating in a slightly lower high extreme price in the late 1990s than that printed in the 70s (still went into the market top zone though). This high then produced a 1-5 down to the lowers price on the chart around 2002.  The next move up to 2011 could be either an A-B-C or a 1-5 and the current move looks decidedly like an A-B-C.  If the 2011 move is an A-B-C and the current move is also an A-B-C then I would expect the current move to be a larger wave B that ends higher than the previous low and spawns a massive rally that ends higher than the previous high and is a 1-5 that goes pretty much straight up.  Either way the current move is and A-B-C so will end higher than the previous low and as most of the bear moves end inside the market bottom zone I can reasonable conclude that this move will end somewhere between 4200 - 8000.

Let's look at a shorter term charts to see if we can refine this.  I have 2 weekly charts attached, the first of which shows the bearish move down from 2011 and the second of which zooms in on the final wave C of C.  In the first chart I can see a clear A-B-C structure to all 3 of the larger A-B-C wave form of the bearish move.  This confirms an A-B-C and not a 1-5 and also confirms that the market is in a final wave C of C, which will spawn that Bull market.  I also have a nice upper resistance trend line and 2 possible lower lines (both may be valid) with a lot of good current (green circle) and prior pivot (purple circle) touches.

If we look at the second weekly chart the wave C of the larger wave C (from the wave B pink) is cutting a clean 1-5 pattern and looks to have just completed the 3-4 part of this.  The rally to wave 4 (blue) is in a-b-c, which you would expect of a retrace so the next bearish phase should be a final wave 5 that will mark the end of the overall bear market.  I would be looking for price to hit one of the lower channel lines but inside or on the 8000 level ideally.  Note all previous moves that did not make it to the extremes zone were not wave Cs (As or Bs) and all the 5 did.  So the conclusion to this is that all wave Cs or motives 1-5s penetrate the extremes zones of the range but As and Bs tend not to.  Also 1-5 waves tend to run hard and fast and make more extreme price tops.  The current move looks line a Wave C that would spawn a 1-5.

Finally looking at the daily chart the current bearish phase looks to have put in a 1-2 (green) of that final 1-5 I am looking for.  I will be tracking this for the 3-4-5 and other signals to see if I can spot the turn.  As and when price breaks out of the upper weekly trend line resistance I think a strong bull market will be in play that could be a motive 1-5 that makes it into the extreme market top zone.  In all of the bull turns through there has been a strong short term retrace so the best strategy might be to let the turn happen and spot the initial retrace turn.  In these agri type commodities getting in on such a range extremes turn has to be the way to play it.  I will be tracking this one with interest for a while but it will require some time still to mature I think. 

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Nice idea thanks for sharing. I'll make sure to give this a watch.

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@Mercury

 

How can it be that the price of coffee is too low to make it worthwhile for farmers to grow, when we all know how popular coffee is in the West?

Surely the 'law of supply and demand' should dictate that the farmers stop making coffee until the price rises ... (I would be willing to pay double for my coffee)

Unless that 'law' is a load of bullocks?

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Posted (edited)

There is a distinct different between the price you pay as a consumer and the price the farmers are paid.  Consider that the commodity market dictated that the price of a pound of coffee was in 2011 was $31 and now it is $9.  I don't know how much a farmer or local merchant might get vs those prices but let's say it is the same % or similar then the farmers have experienced a 70% decline in their revenue.  Even if the buyers have been supportive, and retail prices only seem to go up right, then they will still have seen at least a 50% decline I would hazard.  That would be enough to to drive me to something else...

Also in the programme I saw it was reported that growers were struggling and leaving the industry.  One coffee roaster had actually vertically expanded into growing to secure supply.  I took this at face value.  In any case my point was simply to illustrate a basic fundamental that triggered me to look at the charts.  The power of the thesis is in the charts, the fundamentals merely support the reasons why the price charts have done what they have done since 1975 at least and will likely so so again.

Edited by Mercury
additional point
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Guest Observer

I take real issue with said info graph posted above.

The idea that the milk costs the same as the coffee per cup comes across as a little unlikely. Perhaps believeable but very unlikely.

The real nail in the coffin for this analysis however is the idea that cups, napkins and stirrers combined cost is 18p per cup!!

Ridiculous.

Stirrers are easily less that a penny each, along with the napkins also. So lets say, rounded up to a penny each, (already exorbitant cost for these items) the cups then must cost 16p each.

Again, ridiculous!

Quick search on our "lungs of the earth" market place, the first item that comes up can bag you said cups for just 7p each when buying only 100. And we all know in bulk coffee houses are paying a fraction of what general consumers can buy these for. All in all a totally useless and inept representation of what the breakdown of a cup of coffee looks like.

 

To summarise, this infograph requires a rather large pinch of salt.

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Have been quietly tracking coffee since my first post, nothing much to report until now.  Didn't see that post from Guest Phil until just now (thanks for that) and it shows the basis for my thesis alright and also it highlights a fact than all western economy retail businesses know (at least I can say this for the UK, I assume it is the same elsewhere), which is that the cost of rent and rates is killing retail, especially town centres.  By the way, if Coffee does go on a massive rally I wouldn't want to be owning coffee shop or roaster stocks (sell Starbucks!  BTW, check out the Starbuck charts!!!).  But that's another topic; as regards coffee trading my thesis is that the growers are not making money so they will switch, are switching, to other crops or leaving farming altogether.  Would love to hear from anyone with an alternative take on this and especially anyone trading coffee or with experience of the coffee business.

Looking at the charts then, my long term bearish channel is still intact but the price action since my last post is interesting.  Initially I was looking for a fairly straight bearish run down in a 1-5 form that might signal the end of the market at some point and I was favouring a hit on one or both of my lower channel lines.  I believe we did indeed see a 1-5 down but it was much shorter and quicker int he making and now the market looks to be topping out after an A-B-C retrace.  If this proves correct then I move my initial 1-2 (green) to the current retrace and this signals a much longer bearish move that I might have at first thought.  This could carry deep into the long term market bottom turning zone ($4-8) before turning back into a long term rally.  Even if it only carries to the $8 level there a few 1000 points on offer for a small exposure Short here that is intriguing.

In terms of the technicals there is a 1-5 down to the potential green 1 and an A-B-C up to the green 2, the wave C has its own 1-5, which is important to see.  The turn is occurring around about the Fib 50%, classic retrace zone BUT is just short of the Fib 62% so we could see a test of that before the bear market resumes.  The key oscillators are over bought (RSI just under maybe).

On the 1H chart you can see the EWT labeling more clearly and a potential ending channel in play.  Typically (more generally, not necessarily on coffee) I might expect price to hit the bottom of this channel and do at least 1 more round trip before breaking out but it doesn't have to and there is significant NMD at the recent high.

I went Short just after the 1H spike (let's see if this turns into a daily pin bar candle...) and would consider a Short on a breakout of the lower channel line.  I would be looking for a small 1-2, which we could see inside the channel or more favourably as a break and retest of the channel, which would be another good Short opportunity.  I am guarding against another leg up.

If anyone is trading coffee I would love to heard their views as this is a new market for me so I have little feel for it.

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While we are waiting for the US open I though I would update on Coffee.  I am Short this market for the Short/medium term but seeking a long term bull market beginning.

The market turned nicely between the Fib 50-62% and broke out of an ending channel to the downside, offering me some good very short term Shorts.  I have retained those above the channel.  I cashed below because I was expecting a retrace/relief rally, which we got over the past few days.  I had expected this to run tot he Fib 50% but it fell short and has now broken the previous low.  Looking at both the Daily and 1H charts I see this bearish phase continuing now to test the long term lower channel lines and possible to break into the market bottom zone below 8000.

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The minimum deposit for coffee is very high.  Is it worth it?

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Called the wave 1 wrong, clearly, and the market did not break through the near term support area so back up it went.  Looks like the wave 1 was posted yesterday.  I would now be expecting an A-B-C to the wave 2.  The first rally yesterday carried quite far but this market has a tendency to these wild swings (see shaded area on the daily for recent prior example).  The current top out could be the wave 2 but more likely we will see similar wild swings and a test of the Fib 62% at least.  Still a Short here would not be a bad trade if stops are held above the Fib 62% (or moved to the recent high for a small loss if the market drops fast today).  Either way, once the retrace is done and we get a break of the short term support there are several 1000s of points to be had.

Is it worth it?  Depends on your assessment of risk/reward and capital employed here vs other alternatives.  For me I see a better chance of getting maybe 2000+ points here with a chance of double that for a relatively small 200 point risk than I see on, say, stocks.  Might get 2000 points on Oil in the near future (see my Oil thread post recently) but is Oil less risky than coffee?  Gold/Silver Shorts are my preferred trade from a risk/reward and capital employed point of view.  If USD turns soon it could be the best of all but that requires a trend change, whereas Coffee is already in a down trend of many months (years actually).  In the eye of the beholder I guess...

For the record I am Short Coffee from the previous turn and channel breakout and did take a speculative Short on the open today.  I am Short Gold/Silver from the turn yesterday and Long Nikkei and Dax (see my post on DSchenk's daily FTSE trade thread).  Coffee is a new market for me and I am finding it quite interesting but really I am tracking it for a long term bull market initiation, as described in my opening post.  Is that worth it?  Maybe 30000 points over 3 or so years?

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On 26/09/2019 at 10:04, Mercury said:

I would now be expecting an A-B-C to the wave 2

Sounds like a 90s hip hop music lyric.  :D

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I have been enjoying my coffee of late; really this market, and I assume other similar markets, seem like they couldn't care less about the Fed, economic data, recession and so on.  It is purely about supply and demand; a proper market and a welcome relief from the financial markets nonsense.

My analysis of coffee has reminded me that 2 analysts can look at the same data using very similar methodologies and come up with opposite views, at least in the short to medium term.  There is another analysts (he charges for his services and has a long history in the markets, I am not a client) who has tipped coffee to rally hard (many other commodities too).  I agree with him long term (for the record I only saw his analysis this week, after I had carried out my own) but I felt coffee would at least touch down into that $4-8/lb zone before it rallies where as he thinks it has already turned.  Why is this interesting to me?  It shows that no system is foolproof; it requires an analyst to read it right.  If I am wrong I assume it is me and not the method, and by and large this plays out as I then spot a new scenario or one of my alternatives kicks in.  This is the reason why I tend to have several scenarios in play at key market turns (or potential turns) and it may take some time for a single scenario to reveal itself.  This is also the reason why many of the great traders of the past and present all say that it may take several attempts to catch a major turn.

Anyway back to coffee and I can see those 2 scenarios clearly on my daily chart below.  The scenario that the other guy is tipping is suggesting that the rally from the May turn is a wave 1 (red labels) and that turn was the bottom of the market.  It isn't confirmed because the upper channel line (off the weekly/monthly chart price action) has not been broken.  He thinks the bearish move down since July was an A-B-C to a wave 2 and now we are in a strong wave 3 rally.

My lead scenario is for that rally off the May turn to be an A-B-C to a wave 4 (blue) and now I am looking for a final wave 5 (likely inside market bottom zone, blow $8/lb).  I see the move down to be a wave 1 (green) and the recent rally is the wave 2.  The most recent price action is a small 1-2 (brown) that would set up a strong wave 3 down.  The price action on Friday would seem to support my set up as I would not expect such a bearish candle on a strong wave 3 up!  The turn on Thursday, backed up by the bullish price action on Friday was all I needed to get Short.  I am now stop protected at BE and awaiting developments.  A lower low ideally and then sell the rallies.

While I am, at present, looking at my lower channel line, just inside the $8/lb zone as a likely ending point, if I am right about my labeling of the 1-2 (green) the bearish move could carry much further into the market bottom zone.  So we are looking at a potential minimum 2000+ points but a maximum of circa 6000 ($4/lb bottom range).  Not sure where else you can get such pointage with a very low exposure level (now zero)...

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33 minutes ago, Mercury said:

There is another analysts (he charges for his services and has a long history in the markets, I am not a client) who has tipped coffee to rally hard (many other commodities too). 

Climate change?

People finally value 'real things' over imaginary ones (Bitcoin, paper money, share certificates) ... ?

Maybe coffee will become a luxury good and be unaffordable to the tens of millions newly thrown out of work, while the world elite orchestrates the next 'crisis'.

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Coffee is continuing on my road map with another decent red day and a lower low.  There is now a risk of an A-B-C, as is often the case, which could propel the market into the alternative rally scenario but I think this is less likely now after 2 strongly bearish days.  If and when it breaks past the 9200 level I think 8000 is assured at a minimum.

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While Stocks and precious metal traders wait on tender hooks for a potential turn (or breakdown...) over int he Coffee market things seem more straightforward with a break of a key support zone.  Onwards to test the next I reckon and if that breaks then next stop 8000.

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Another good day for Coffee Bears.  At some point we should see a relief rally or consolidation pause but impossible to say where.  There is PMD on the 1H chart but that is not necessarily confirmed or relevant given the pace of the bearish move.  I would be more of a mindset of waiting for relief rallied and selling into them that selling on a level break through at this point but that all depends on your tolerance for large draw downs.  I will be very keen to see where any significant consolidation occurs and of this takes the form of a Flag or Pennant as this will be instructive as to how far this bearish phase could run.  For now I am still targeting 8000 but there is a decent chance that this could go much deeper into the market bottom zone before the trend change.

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Coffee has just made a reversal that brings up a long term rally scenario.  Whereas I had been tracking further declines, but only to set up a major long term rally phase, there was always an alternate scenario such that the end of the Bear was already in.  That alternative scenario now looks increasingly likely such that I cashed all my Shorts and went Long late last week (week just ended).

The technicals:

  • The bearish move off early July top (1-2 Purple) could be seen as either an A-B-C or a 1-5 but the A-B-C is perhaps a bit more obvious.  There is strong PMD at the turn and rally point as 2 (purple)
  • The rally up to 1 (green) again could be read either way but the bearish move down to 2 (green) is a definite A-B-C in my opinion.  Had the subsequent rally been a short lived consolidation type move I would have readily believed that the bearish move would continue but after a short 1-2 (brown) the market rallied hard.
  • Still if this rally was short lived it might be an A-B-C that set up a strong bearish move but then the next bearish phase shaped up like a Pennant or more likely a small scale 1-2 and then rallied again
  • Now that price has broken back above 10,000 and made new higher highs I am much more convinced of the long term rally scenario.

Obviously we need to see price break above the 10500 level to be more certain and then a break through the long term channel line (circa 11,000) is the next important move and then ultimately a break above 11,500 seals the deal.  As there is a potential for this market to reach $30/lb there is plenty of time and lots of reward on the table.  Frankly, given the nature of markets like stock indices, I find this opportunity far more compelling.  Where else would you get a 20,000 point opportunity?  Maybe if the Dow has a total meltdown...  Of if the massive destinations for Gold and Bitcoin come off but that is all uncharted territory.  This isn't!  Just look at a price chart since the mid 1970s...  

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@Mercury Yes, a rally is more probably as we now know that global warming is threatening coffee production.  Curiously, it is also threatening bananas but I don't know if they are available to trade.

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When looking at Coffee price action especially Arabica then one needs to look at the fundamentals too to see what the narrative was behind any recent price rise. 

So for example there was an appreciation of the Brazilian Real against the US Dollar. There were also some extreme weather conditions with cold weather and drought conditions.

Supply and Demand will play a crucial role going forwards so you need to keep an eye out. As long as you know there is a narrative behind any price action then you know that the trade has at least a foundation rather than just solely a speculative nature.  

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What I drew up hastily above is a descending triangle and it is bearish, not bullish.  I am not thinking properly.  Again 👺

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Well no doubt the descending triangle can be described as bearish but the salient point here is whether the market is about to, or already has, turned bullish.  The maxim to think of here is buy weakness.  By the time the trend looks bullish enough a sizable chunk of the move could be done and it will be harder to get in safely (i.e. without a huge draw down risk).

In terms of the macro/fundamentals picture it is simply one of supply and demand.  At these prices the farmers cannot make money so they switch to something else and the workers cannot be paid sufficient for their needs because the economics are against the farmers so they stop coming to work and go find something else to do.  No farm hands no business.  You don't need to track this, just appreciate that this is where we are.  Then starts a cycle of price increase until it is worth getting back into coffee farming and the cycle repeats itself.  In between the market extremes can be sharp moves due to weather or some other impacting factor but generally the trend will remain the same until the cycle is completed.  There is no sign of coffee demand shrinking so as supply shrinks the price rallies, basic high school economics really.

If you want to see this in action just look at the Monthly chart, I have attached it below again.  You can see the cycle clearly.  Note also the very strong PMD that precipitates each rally phase, which is what we have right now and since 1975 this massive PMD has always produced a big rally...

Looking at the Weekly, since my first post we have seen the bearish move bottom out with a higher low and then put in another 1-2 bearish retrace before rallying away.  To me this suggest that the bottom of this bearish cycle has been achieved, which I denote as a wave C (pink/purple).  This is a macro wave end.  Then we have a series of 1-2s that is setting up a strong wave 3 rally.  On the weekly you can see an important resistance level around 11,500 ($11.50/lb).  This area has been a key zone of support/resistance over the long term and we may see some initial rejections here and a consolidation phase before a breakout.  We could see a fast breakout either of course...  There is strong PMD on the weekly chart as well and both Pink and Purple (see monthly chart) A-B-C is sound with the final bearish wave C describing a near perfect 1-5 form.  Note an A-B-C is a counter trend wave, which is usually followed by a 1-5 motive wave (this means the wave top exceeds the start of the A-B-C, which suggests the next rally phase will carry beyond the 30,890 level.

On the daily chart you can see the 1-2s more clearly.  Again there is PMD at the wave C bear market end and also at the wave 2 (purple).  There is PMD at the wave 2 (blue) on the shorter time frame charts.  Both 1-2s are good A-B-Cs and now we have a higher high than the wave 1 (blue).  All very bullish.

Next comes a test of the bearish channel resistance line and above that the 11,500 key resistance line.  Given the price action of the current rally I might expect a pull back or consolidation either at the channel line of the key resistance line (above or below) before the rally really gets going.

There is a trading dilemma now though.  Do you go long now with a wide stop in case there is a strong breakout or wait for a pull back/consolidation that might never come.  Trading is not easy!  Another thing to watch out for is opening gaps.  This market gets a lot and we could see a large gap through resistance, which would most likely be a breakaway gap (i.e. it will not be closed).  This market is getting more interesting by the day and given the potential (20000 points or so) and despite the fact this may take years to achieve it is as good an opportunity as I can find anywhere.  The big players must know this too...

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Forgot to note the COT data!  on my daily chart.  At the wave C turn (or just before it actually) the net COT position for non commercials was -70K a major low and at the recent wave 2 (blue) again it was at a significant net low.  If I drew a graph of the net COT positions for the non commercials they would show a correlation to price (i.e. the non commercials are net max short when the market turns bullish).  This is because the commercials, the smart money in that they are the ones who really understand the supply/demand situation best, whereas the non commercials have to analyse it to figure it out, and seemingly mostly get it wrong.  Commercials appear to be reading the market such that they want to lock in prices via futures contract while the prices are low, fearing the price surge my analysis is suggesting.

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On 02/11/2019 at 20:39, dmedin said:

Is this the right one?

That is the point in the curve I am looking at but also the one before that in May.  I don't recognise the price levels of your chart, which has the recent low as lower than the May low, IG charts are the reverse of that.  Also I think the data underlying the COT trend is Futures only, whereas I use Futures & Options data.  However either way the message is the same for me.

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Hmm okay.

 

Edited by dmedin

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