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Hot Coffee Needs To Cool After Steaming Arabica Rally

By Investing.com (Barani Krishnan/Investing.com)CommoditiesSep 01, 2021 04:36AM ET
www.investing.com/analysis/hot-coffee-needs-to-cool-after-steaming-arabica-rally-200600597
Hot Coffee Needs To Cool After Steaming Arabica Rally
By Investing.com (Barani Krishnan/Investing.com)   |  Sep 01, 2021 04:36AM ET
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It has served up some of the hottest returns this year in commodities. But new investors to arabica should resist the urge to jump right away into the premium coffee bean market, which is overpriced after a rally in four of the past five months.

As trading for September began on Monday, arabica ruled the roost in the commodity crop world, with a year-to-date return of 52%. 

Such bloated gains also diminish the potential for new entrants in the market, with charts indicating that a drop of at least 5% or more will be needed to justify the risk for fresh long money eyeing a good payback from the coffee of choice for chains, such as, Starbucks (NASDAQ:SBUX) and Restaurant Brands International (NYSE:QSR) owned, Tim Hortons. 

Without the correction, debutants in arabica may still win, but also face the hazard of a downside that might not be very far away, says Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India.

Coffee Daily
Coffee Daily

All charts courtesy of SK Dixit Charting

In Wednesday’s pre-New York session, the most-active arabica contract on ICE Futures US was at around 1.95 per lb.

Said Dixit:

“It needs to come down to the $1.85 support level, to justify the risk for new money coming in. Investors who jump the gun may be left holding the bag when arabica finally corrects from the excesses of the past two quarters.”

Arabica peaked at a near 7-year high of $2.15 in July, and a relatively-low close of almost $1.80 that month had led to a bullish engulfing formation with a pattern target reaching $2.45, said Dixit.

Coffee Weekly
Coffee Weekly

As such, the continuation of arabica’s bullish trend will be subject to prices holding above $1.91 in the short term and $1.81 in the short to medium-term. 

Added Dixit: 

“The coffee brew smelt great last month when it hit $2.15 but the lid blew off and it closed at sub $1.80 prices. The current month shows upside bias but momentum and volatility appears to be limited due to a very overbought reading.”

Arabica’s Stochastic RSI at 97/97 on the monthly chart showed odds in favor of some healthy price reversal and distribution, he said.

“This can force a break below $1.81, and open the gates for a further downside of $1.68 to $1.62.”

“It’s easier for arabica to re-energize for a move higher if it comes back to a good support level now, such as $1.85.” 

“Post this significant correction and distribution, coffee should build a robust base for relaunch to test the resistance areas of $2 and above, then break free above $2.15 and start heading for $2.25.”

Coffee Monthly
Coffee Monthly

Fundamentals will need to play their part too for arabica to stay bullish, said Jack Scoville, chief crop analyst at Chicago’s Price Futures Group.

While the premium coffee bean did see a bout of volatility in mid-August, its path upward has been little challenged, thanks to a crop freeze in top growing country Brazil.

Said Scoville:

“The current Brazil harvest is starting to wind down with smaller production."

“Brazil forecasts call for above normal temperatures for at least the next week, but the damage from the freeze a couple of weeks ago is easy to see. It is flowering time for the next crop, but the dry weather is helping to keep the flowers from appearing.”

Due to the process, some trees were killed and had to be replaced, he added.

“The current outlook calls for 10 days of dry weather which will not support the flowering but will keep the harvest active.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Hot Coffee Needs To Cool After Steaming Arabica Rally
 

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Hot Coffee Needs To Cool After Steaming Arabica Rally

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Comments (4)
Toddy Rich
Toddy Rich Sep 08, 2021 1:53PM ET
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The uptrend appears to be still solid, and the fundamentals seem not to have changed to neutral or bearish yet.  I've taken off about 1/3 of my long position off in the past few weeks, but not gonna take off any more or add any back.  That move to 2.15 in late July '21 was an anomaly of massive speculative buying due to anticipation of an additional late July '21 freeze beyond the early July '21 freeze.  When the second freeze didn't reach fruition, the market quickly retreated, burning a lot of longs that were chasing a short lived overdone, premature move.  So the market retreated, and consolidated around the 1.80 level to resume the trend line on the weekly and monthly charts.  Today we see a move back to around 1.88, and that's still not cause to turn bearish in my opinion. I'm focusing on the fundamentals, and there I can't see a reason to get medium to long term bearish yet.  Short term, who knows? Coffee is the wild west of trading, and it can chop up a trader easily.
Ufeli Augustine Denilson
Ufeli Augustine Denilson Sep 01, 2021 7:45AM ET
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Am new here ion know what to do
David Obi
David Obi Sep 01, 2021 7:03AM ET
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Am new here guys I don't even know where to state from
marcelo moreira
marcelo moreira Sep 01, 2021 5:22AM ET
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prices for arabica will conronue to rise! production costs have increased dramatically in Brazil and many producers affected by the frost are changing to grains! Brazil robusta shall have a good 22/23 crop (above 20 million bags) but arabica will suffer again with production expected to be about 30-35 million bags only! next two years will be tight if global consumption continues increasing 1-2pct/year!
Barani Krishnan
Barani Krishnan Sep 01, 2021 5:22AM ET
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Thanks for that insight, Marcelo. Much appreciated.
 
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