Commodities Weekly: Coffee Grinds Out A Classic Trend Reversal

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Are Softs finally showing signs of life?

Base Metals, Grains, and even Energy have posted strong rallies over the last year. Yet the Softs -- Cocoa, Coffee, Cotton, and Sugar -- have continued to struggle below overhead supply.

But we’re seeing all the traditional signs of a structural trend reversal from this lagging group right now.

Let’s take a closer look at Coffee futures to pinpoint why we believe this bear-to-bull trend change is underway… 

Here’s a weekly chart of Coffee: 

Coffee futures have been in a nasty downtrend for almost a decade. But that no longer appears to be the case as they recently broke above a decade-long downtrend line in early February, signaling a potential shift in the primary trend.

The long-term moving average flattening out and turning higher is another classic sign that buyers are taking control.

This week, Coffee broke above a key level of overhead supply to its highest level in roughly 4-years, giving us further confirmation of the underlying trend change.

Price closed above 140 today, completing a 3-year basing pattern and indicating the path of least resistance is now higher.

We want to be buyers of Coffee above 140 with an initial target of 172. But if we're below 140, we don't want anything to do with it. We can shop elsewhere.

Sugar is approaching its first upside target. Cotton and Cocoa are making higher highs and higher lows. Combine all of this with the latest breakout from Coffee, and you can clearly see the burgeoning strength in Softs.

Signs of strength in the laggards is a promising development for both Commodities and risk assets in general. These developments also support our current risk-on theses and themes that continue to play out across markets and risk assets around the globe.  

Thanks for reading. Let us know what you think, and be sure to check out this week’s Commodity Report!