Coffee

The coffee market has been showing strength for some time now. Recent price action has chart watchers and long-term trend followers entering new long positions. Typically, the coffee market is not kind to trend followers with tight stops, but the International Coffee Organization has reported that stocks were decreasing as producers anticipate even higher prices in the offing.

Coffee is rapidly shaping up to be a market where fund buying is now being matched by a bullish fundamental story-with coffee roasters seen buying shallow and infrequent dips. It is hard for me to think that this market will leave those with brand new long positions untested. I would look for coffee to test the 18 day moving average near 142 basis the May contract month. This is also a former swing high from earlier in the year.

Orange Juice

Last week, the U.S. Department of Agriculture reported expectations for the Florida orange crop for 2007/'08 lowered by 2 million boxes to 166 million, but raised the per box yield to 1.62 from 1.60 gallons-essentially a push. As the holdovers from last year's seasonal frost play continue to exit long positions, we are also seeing new short positions established by the few funds that do play in the OJ market. Technically, the market continues to erode and is approaching oversold territory. And the latest quote in the May contract, 129.00, is a full 11 points from the 50 day moving average.

Fundamentally, orange juice news is bad. Prices at retail are giving consumers sticker shock, and it seems there is a new beverage choice every day. Near term, I would not be surprised to see OJ correct to the 10 and 18 moving average area of 135 - 136-where futures traders could take short positions risking a close or two over the 50 day moving, roughly 141.00. Options traders can look to position for lower prices with put spreads, buying 1 OJ May08 130 put and selling 2 OJ May08 120 puts per spread for 1.50 points (a cost of $225 per spread plus commissions). We would look for the May contract to expire at or near the 120 strike for a gain of 10 points or $1,500 per spread.

Sugar

The sugar market continues to show impressive technical action. Last time, I mentioned that the area bounded by the high and low from the Fluxa dust up looked like the beginning of a triangle formation, which could help us predict market direction. While we have yet (as of this writing) to break out of that area, the market has shown a reluctance to spend any time at all below the 18 day moving average. I am hearing about short covering from both speculators and producers on breaks lower, which goes a long way toward explaining the supportive price action in what is a fundamentally weak market. The stakes are big at this stage of the game, with the funds monster longs versus the giant commercial short position. The commercials have deep pockets and don't tend to get stopped out easily, but it would appear that they are beginning to cover positions.

This change of ownership can signal an end to an established trend. Occasionally, it can also signal that the commercials are not currently correct (also known as wrong), and are going to be buying all the way up to 1350 and beyond. This type of price action was last seen in the grains, where commercial short covering sponsored significant moves higher. Here again, the distance between the 50-day moving average (11.60) and the current price (12.89) is big, so trade accordingly and within your tolerance for risk. Know your exposure and if there is anything we can do to help manage risk, don't hesitate to call.