Coffee Traders' Forum - A Discussion about Coffee Futures Trading
Coffee Traders Discussion Forum
Very interesting COT report, featuring big U liquidation, which will be amplified further come Monday morning with activity from yesterday and the expiration of U7 options. EFP's are on the rise, which is typical as FND is approaching.
Some big numbers being tossed around in this report. The obvious movers, no real surprise. Commercial shorts continue to pile on "new" sales. Not a surprise. Over the last several reports, particularly back when in late June / early July I have commented on how the commercials would be willing sellers on any advance. It has kept things orderly in the face of big short-covering on the part of the funds. Sticking with the commercial sector, we see commercial longs again liquidated as the market made 3 month highs on the move back through 1.40. With the 1.40 strike we see a good deal options delta built in and the supplemental report shows a net change of -11,228 for the week. I highlighted the gross change in the commercial short position as they have been responsible for the large majority in the net commercial change over the last 4 weeks. Swaps saw modest changes this period.
On the non commercial side, it is almost a mirror image with the fund shorts driving the bus. Like we saw with the commercials, the advance higher has resulted in a noticeable change represented by delta. I again attribute this to crossing the 1.40 strike. Large fund shorts via the supplemental covered 11,184 contracts ( almost identical to what the commercial shorts sold). Again, notice the change in the gross short position from July 21 (decline of 30K+). Looking at the disaggregated , as discussed the managed money continues to short cover. We see large traders doing what they have done throughout this rally. Taking advantage of the gains and liquidating longs. Small traders were net buyers, mostly in the form of short covering.
Index traders again active, though the net change is a modest +527. Over the 4 week period the gross positions have not changed much but week to week we see both sides are active.
Where do we go from here??
Well now that options have expired and the roll is dominant, we can expect the focus to shift to the Z7 contract. I have expressed my views (as have many others) that Q4 will be supportive of steady to higher coffee prices. Since this report, we saw the market correct and rebound 50% of that correction. While I was impressed with yesterdays action, I think the early trading this week can help give a better indication of short term direction. I do expect increased choppy trading as the residual rolling takes place leading up to FND. I think its important to point out the significant shift in positioning by the different sectors. We saw evidence yesterday that the systems were still in buy mode. The COT tells me that there is now room for them to begin to reverse if the market falls, the question is what is that trigger level. Clearly, the 7 cent dip from the highs was not enough to turn the momentum.
We have heard the news. Smaller bean size, disease, potential drought are all bullish facts /ideas moving forward. We have the debate of exports vs. imports and location of stocks being discussed. Seems as though wherever you stand on this debate is almost one of a political stance. Meaning, that is your belief, and a hard one to change. We have Phil questioning the intermediary stocks and how this lingers over the market. We have the prominent Judy Ganes commenting on the situation in Brazil and regardless of how you interpret the story , she raises enough concern IMO to corroborate much of what has been trickling out in the form of news. All of this makes for interesting discussion and what I expect to be a very interesting market moving forward .
Lastly, I would be naive to not mention the elephant in the room. This goes beyond coffee, but it is a geo-political threat being watched around the world. In my opinion, a scary one. The North Korean situation with the United States. I have no doubt that while the market was quite overbought and there was persistent bearish divergence , the sell-off Thursday was aided by the tensions created by the saber rattling of President Trump and Kim Jong-Un. We saw equities under intense pressure which spread to the commodity complex (with the obvious exceptions like gold and silver). Waves of selling at times simultaneous across certain markets. Besides being a scary humanitarian situation, it needs to be watched as news and comments emanating across the media outlets trigger the algorithms across the general market place. In the end, a market such as coffee will resort back to its own technical and fundamental story, but opportunities will arise from unforeseen macro triggers.
Anticipate comments. Good trading all.