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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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