Of late life has been tough for Coffee (DBA,BJO) as the agricultural commodity has tumbled to a 12-year low. However, I believe the commodity shall have a further fall in the coming weeks which shall result in it reaching the 87.69 mark. Thus, to ascertain the likelihood of this occurring, I shall look at the fundamental news affecting the commodity whilst analyzing the charts using technical analysis tools.
Fundamental news affecting the commodity:
- Coffee shortage:
Presently, the level of coffee supply is in surplus but this may not be the case in the coming year. I say that due to global coffee associations announcing that unfavourable weather conditions coupled with crop diseases could lower harvests in the next season.
However, in the first part of the year, Brazil’s coffee exports did fall due to a strike done by truck driver's in May. But, a recovery did occur in June as exports reached 2.55 million bags which was a 48% rise from May and a 16.5% rise from June 2017.
- Coffee producer’s issues:
Another reason coffee has been in a constant downward spiral is due to the high level of weakness seen in the currencies and economies of nations supplying the commodity, such as Brazil and Kenya.
The Brazilian Real from 2017 has lost 40% of its value against the US Dollar and 45% of its value against the British Pound. Moreover, for Kenya we see that their economy is in tatters as the national statistics are worsening every quarter. Industrial production levels tumbled to 4.9% from a prior value of 6%. Moreover, the inflation level rose to 8% which clearly shows the economy is in the red.
- Coffee composite indicator:
In July 2018, the International Coffee Organization’s composite indicator fell by 3% to $1.07 per pound. Moreover, this is the lowest level seen in the past decade. The fall resulted in traders placing huge short positions on the commodity which in turn rose the net short positions to a record high of 90,000 in August. Furthermore, if we convert the present short positions into coffee bags then the net shorts' stand at an equivalent of 25 million coffee bags which is above half of Brazil's annual coffee yield.
- Coca Cola’s expansion into Coffee:
Coca Cola (NYSE:KO) has signed a deal to purchase Costa for a whopping $5.1 billion. This not only opens a new business line for Coca Cola’ to diversify into but it shall also have a great long term impact on the commodity.
Technical Analysis:
Daily Chart:
The commodity’s daily chart indicates that in the coming days, Coffee shall have a bearish continuation. However, on Friday the commodity formed a large rising window which can be classified as a bearish trap. I say that as the rising window formed with a Doji candle pattern which signals to traders that the market is confused. Moreover, the rising window was merely a knee jerk reaction to the commodity hitting the short term 161.8% Fibonacci support zone.
On the price target front, I do not expect the commodity to extend its fall beyond the 100% support level at 87.69. This is due to this level being a long-term candle support line. Moreover, the 50% level is 94.99 and the 61.8% level is at 93.27.
On the indicator facet, the long-term RSI is flat thus indicating that the current upward ascent is temporary in nature. Thus, we can expect the RSI to be heading downwards in the coming days. Furthermore, the ADX lines have perched at the same spot hence demonstrating to investors that the bearish trend strength is robust.
Weekly Chart:
The commodity’s weekly chart indicates that coffee shall be having a bearish continuation in the long run due to the formation of a failed Hammer candle pattern. The hammer pattern psychology indicates to traders that after a last burst of selling, new buying has commenced. However, for the hammer pattern to be effective, it ought to receive a bullish confirmation but that failed to happen. Furthermore, this week we have seen a large bearish candle form which looks somewhat like a bear separating line. Thus, due to this I expect coffee to fall between the 100% and 127.2% support levels. The 100% level is at 87.69 whilst the 127.2% level is at 83.72.
The big picture:
In conclusion, I am leaning towards the bears being in the driver's seat for the long haul. This notion of mine is fuelled by the fact that the technicals and fundamentals support a descent. However, whichever way you do decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation which is of prime importance.
Good luck trading.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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