Coffee futures traders are speculating that the soft commodity is approaching bull market territory as signs of a smaller crop out of Brazil due to bad weather. In the case of sugar and corn, rain is the cause of larger than expected crops, but the heavy rains in December are expected to cut the arabica coffee crop by as much as 40 percent.
“The price trend is changing because the market is anticipating that Brazil will struggle to maintain the high production levels of the last couple of years,” said Hernando de la Roche, a senior VP at INTL FCStone. In December, the Brazilian coffee belt received 25.6 inches of rain, nearly quadruple the average amount in the region.
In 2013, coffee prices dropped 23 percent, but price action has been upward after reaching the November 7 low of $100.95. Price action began to trade in an upward channel. After being ranged bound, coffee futures broke to the upside after achieving support at $110.39.
Price action has recently been rejected by the resistance trend line in the channel twice, and the most current session closed right underneath. There are two levels of resistance: price action resistance at $121.44 and the 200 EMA at $122.43. If momentum wanes, a pullback to support could happen, while a break to the upside could pave the way to $126.73.