Coffee futures are testing critical support levels, and could offer a good risk reward buying opportunity at current levels. Natural Gas should remain under pressure breaking the $3 level.
Coffee futures have been in a wide trading range over most of the past year between the 1.60 and 2.25 levels. After being one of the strongest futures markets in 2014, we are approaching a situation similar to the time coffee had a huge rally last year on concerns of drought in Brazil.
With weather better than expected in South America, coffee futures are back-testing the lower end of the trading range around 1.60, and as a weather market is probably further extended on the downside as it should be. There is potential the drought last year in Brazil damaged the 2015 coffee prospects, so sentiment might be too negative at current levels.
This should remain a volatile market over the next couple months on South American weather forecasts and rain levels, but I think coffee is setting up for a nice risk/reward trade to the upside. With prices hovering just above 1.60 critical support, I think you are risking 1.50 on the downside with upside potential above 2.50. I’ll take a shot on a 9 to 1 reward to risk trade any day!
Natural Gas seems to be catching up to the other energy futures markets on the downside, and I like short natural gas positions here as the commodity has broken below the $3 support level. I believe this break opens the door to the 2012 lows around $2. I would look to sell Natural Gas on rallies back towards the $3 level, as continued high supply should keep this energy market under pressure.
Full disclosure: Positions in KC Options,CAFÉ & JO equity, QG futures