Robusta Coffee broke through the bottom of its upward trendline. Is Arabica Coffee next?

Spread Edge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates.  SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.

Overview

Each week the SpreadEdge Newsletter documents an extensive list of seasonal, technical and fundamental indicators for the various commodity markets.  This article I will focus on Robusta and Arabica Coffee and review the daily charts, % carry yield, and relative price and positioning.  Each of these indicators will be reviewed in the following sections.

Technical Analysis

Robusta Coffee dropped (3.58%) on Thursday and clearly broke through the bottom of the upward trendline.  RC has been trending up since this time last year and increased 239% from the October 2023 low to the high in late September.  Even after the recent drop, Robusta Coffee is still double where it traded in late October last year.

% Carry Yield

Futures calendar curves vary in shape over time. Some often invert, with front-month contract prices exceeding those of later contracts, resulting in positive carry. Conversely, some curves exhibit contango, leading to a negative carry.  % Carry yield is the one-year calendar curve yield as a percentage of contract notional value.  Markets tend to reverse when they get at or near their highest or lowest levels over the past 52 weeks.

Robusta Coffee closed Wednesday with a % carry yield of 12.0% which is well off the 52-week high of 18.9% in late July and the recent high of 16.7% 4-weeks ago.

Arabica Coffee

The daily chart for Arabica Coffee is very similar to the Robusta Coffee chart.  Note that both markets have been riding an upward sloping wedge for the better part of a year.  However, the notable difference is that Arabica is still hanging in above the bottom of the channel.

Note the divergence between the daily price action and the % carry yield.  Arabica is now (7.4%) off of the most recent high while the % carry yield set a new 52-week high based on Wednesday's close.  It seems that something has got to give and if Robusta Coffee is any indicator, the next move most likely will be through the bottom of the channel.

Relative Price and Positioning

Relative Positioning – Oversold versus Overbought on the horizontal axis.  COT current net position compared to the COT data over the past 24 months.
Relative Price - Cheap versus Expensive on the vertical axis.  A comparison of the front month current price compared to the front month price over the past 24 months.  
 

• Arabica Coffee and Robusta Coffee continue to be the most “Expensive and Overbought” markets within the agriculture complex.  When hedge funds and CTAs start to sell, these markets will return to normal levels very quickly.

To Trade This

I am currently short the Arabica Coffee December, March calendar spread that is down slightly.  If I were to open a new trade, the May, September calendar spread would be my choice.

More Information

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The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets.  In addition, spread trade recommendations and follow-up on open trades is also provided.  For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com

Darren Carlat

SpreadEdge Capital, LLC

(214) 636-3133

Darren@SpreadEdgeCapital.com

www.SpreadEdgeCapital.com

Disclaimer

SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.