Coffee futures have been the big story in recent weeks due to the fact of a huge rally in the last 2 weeks caused by hot & dry conditions in central Brazil which is causing prices to move much higher as we have not seen a drought since 1989 and there are no rains forecast in the next 7 days which could push prices up even higher.
Coffee is trading above its 20 and 100 day moving average settling at 137.85 a pound in the May contract up about 1000 points this week with extreme volatility as Brazil's crop is estimated between 54 – 55 million bags and that could be lowered if this drought continues in the month of February and as I talked about in previous blogs the volatility is extremely high.
So I would look at bull call option spreads for the month of July limiting your risk to what the premium costs also allowing you to stay in the market without getting stopped out because there are days like Thursday when prices were down 700 points which is around $3,000 a futures contract as the volatility is here to stay and I do think higher prices are coming.
The 50% retracement from the recent high to the low is right around 130 so if you’re looking to get into a futures contract I would look to buy that level placing my stop at the 10 day low which currently is at 115 risking around $5,500 per contract.
Coffee is a very large contract and if you're right it will pay you off tremendously as I've gone through similar events in this market especially in 1994 when prices went from $.75 to 2.70 in a matter of months due to a frost and if this drought does continue expect coffee possibly getting up to the $2 a pound level as prices could really explode just like what happened in the grain market in 2012.
Current coffee trend: HIGHER
Current chart structure: TERRIBLE
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