Coffee is a sector I have been watching for while and think this is a good long for 2013 and longer-term. Coffee has declined over 50% from its highs in 2011, this has helped companies like SBUX , Smuckers and GMCR as their margins where much higher. But these lower prices really affects the growers and the lower it gets the harder it is for them to make money. Now it appears this decline could be over and growers could be benefiting and roasters and sellers could be getting squeezed.
Historical Charts: Over last couple of weeks Coffee had been basing around 141.55 level where it seem to finally stop and slow down the current downtrend. Looking at the weekly chart this level is strong support. The 141.155 support level comes from the breakout level from 2010 when coffee prices rose to highs at 310 are a 120% increase.
In fact the 141 level has been the normal bottom price for coffee over the last few decades. Even if coffee is to move lower, the lower prices just add to continued support. Historically coffee has bottomed around 123, so there is the potential for coffee to move lower. The drop in 1998-2002 was caused by a coffee crisis, which will do not appear to be having now and safeguards and industry standards are in place to prevent the crisis again. Here is a good article on it. Coffee Crisis
Short-term Bullish Breakout: The key bullish break for Coffee was the breakout on Friday which broke above resistance at 150 and more importantly the immediate-term downtrend line. The break above the 150 levels is a new potential support level and new stepping stone to move upwards. The 70 day ema stopped the lastest move upwards and have been the measuring stick to see if a rally can happen. A break above this would add to the bullishness of the stock. Coffee’s decline has also caused a large amount of short speculation which leaves it open to a short-squeeze and potentially higher prices.
Support and Resistance: If coffee continues to rise a long-term potential target is 181.53 which is only a 23% retracement from the fall in 2011. But since coffee is in its beginning stages of a run upwards, we need to take a short-term view first. The 150 level should hold as support, if not expect the 141 to be tested again. The next resistance level is at 157.22, above this level is where Coffee can really run, since there lacks resistance till 173.34. Above this level resistance is at the 23% retracement and the highs from 2012 which will be resistance. Coffee could continue lower if it fails to move upwards and breaks back below 141. The drop would not be to far just 8-10% to 130-123 which would provide even more historical support.
How to Play this: $JO is the coffee etf that can be used to play this bounce and get exposed to a coffee trade. For JO support is at 34 and the key long term support is at 31.38. JO potential 23% retracement is at 43.53. JO needs to get above 36.35 to really get a run up to the 43 level.
Overall Coffee appears to be ready to run upwards after its year and a half decline. This will be good for the coffee growers but it could potentially hurt the roasters and sellers of coffee. It won’t affect them right away since Starbucks makes its own prices and buys well out in advance. But if we get a rise of 20% and a price at stays 20% higher the great margins the coffee industry is enjoying now will be affected and you the coffee drinker may be forced to pay for this. Here is another article to read on the 2013 coffee prices