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 week Arabica Coffee is in the spotlight as there are several indicators that are flashing extreme levels. These indicators include % carry yield, hedge fund position estimates, and relative price and positioning. Each of these indicators will be reviewed in the following sections.
% 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.
Coffee is currently at its highest carry yield for the past 52 weeks.
Hedge Fund Position Estimates
The Commitment of Traders (COT) report, issued by the Commodity Futures Trading Commission (CFTC), offers a weekly snapshot of the positions taken by different market participants in the U.S. futures markets. Published every Friday at 3:30 PM Eastern Time, the COT report reflects positions held as of the previous Tuesday's closing business hours. Peak Trading Research assesses the latest COT report, examining alterations in price and open interest to provide an appraisal of net fund positioning daily.
Coffee reached a peak of 75,883 net long contracts back in April and has maintained levels over 50,000 contracts ever since. This week hedge funds have an estimated 65,221 net long contracts.
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 continues to be amongst the most “Expensive and Overbought” markets across all commodities. Gold and Robusta Coffee are the only other markets as extended as Arabica Coffee.
Technical Analysis
Coffee continues to ride up the upward wedge. Last week Coffee attempted to break out but settled back below the upward channel. The close on Tuesday was the highest since September of 2011.
By the way, Coffee dropped 194 points and 64.8% from the April 2011 monthly high to the October 2013 closing low.
Open Trade
I currently have the December, March calendar spread open in client and personal account. This trade should benefit if Coffee begins to move towards the bottom of the wedge formation.
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
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.
On the date of publication, Darren Carlat had a position in: XFZ24 . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.