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The market saw a significant long liquidation break from Monday’s highs and fell as much as 12.3% in just three trading sessions. This leaves the market in an oversold technical condition but the follow-through selling certainty confirms that a major top is in place. Weakness in the US dollar and ideas that roasters may emerge to provide some support could spark a corrective bounce today. Open interest has been declining since mid-July as short-covering was the foundation for the last leg higher to 12 1/2 year highs and open interest declined sharply in the past few sessions which could be an indication that speculators are liquidating longs. The small and large trader combined net long position reached nearly 50,000 contracts in the last COT report which is considered overbought and a general sense that the world and US economies may weaken along with the recent uptrend in the US dollar has fund traders second guessing the “buy and hold” commodity play which has been a popular theme in recent months. December coffee was unable to recover from Tuesday’s huge losses, and extended the sell-off even further to the downside during the session yesterday. At this point, the market has moved over 18 cents lower in just three sessions. A 30% production increase over last year’s levels from a major coffee growing state in Colombia, in spite of disease outbreaks, had led some to lift overall projections for Colombia coffee production this season. Carryover coffee stocks in Vietnam for the upcoming crop year are expected to be larger than last season’s levels, in spite of heavy exports during July. Vietnam officials are still expected to move ahead on their stockpiling plan in which up to 500,000 tonnes (or near 50% of this season’s production) would be held off of the market for up to six months to support producer prices. The coffee market faces a significant (7-8 million bag) world production surplus this season which should help alleviate tightness in the cash market. ICE exchange stocks were down 5,867 bags yesterday to 2.022 million with 27,179 bags pending review.
TODAY’S GUIDANCE: Look for selling resistance to emerge near 174.20 and 176.90 for December coffee with 161.10 as next downside objective.
