When the front month has a higher price than prices for months further into the future. This occurs when there is high spot demand.
Often shortened to BPs, a Basis Point is a unit of measurement to simplify discussion of the percentage change of interest rates. For example, if a sentence reads ‘the Central Bank’s interest rate of 10%, increased by 10%’. The reader may interpret the new value to be a total of 11%, or a total of 20%. A Basis Point is equal to 100th of a percentage point, or 0.01%. Therefore 100 basis points equal 1%. If the sentence reads, ‘the Central Bank’s interest rate of 10%, increased by 100 Basis Points’, it is clear that the new interest rate is 11%.
If you are bearish you think the market will fall, and a bearish market is a market that is falling.
Where a coffee tree produces higher yields in alternating years. This can be determined by the genetics of the tree, and the climate.
If you are bullish you think the market will rise, and a bullish market is a market that is rising.
A Candlestick Chart is an effective way of analysing the market. It gives four pieces of data: market open, market close, the day’s highest market level & the day’s lowest market level.
Certified stocks refer to coffee that has been graded by exchange (ICE) approved graders and is warehoused in exchange approved warehouses across the globe (Antwerp and New Orleans for example). These stocks ensure that the underlying commodity (Arabica or Robusta) of a futures contract (coffee future), meets the minimum specification as outlined in the futures contract (number of defects for example). Thousands of bags of coffee are literally sat in warehouses all across the globe waiting for market players to draw them down and roast them. They can sit there for years and the number of certified stocks is important because it gives you an indication of market sentiment on both the physical supply of coffee, and also the futures price. If there is a shortage of containers in Brazil for example and people think there might be a short run shortage of supply for coffee, you might see an increase in the coffee futures price and if people need coffee and are drawing down certified stocks, this could exacerbate the uptrend.
Channels are double trend lines essentially. A line that can be drawn between connecting points parallel to the main trendline, creates a channel. Channels provide Support/floor (lower line) and resistance/ceiling (upper line) levels.
The ICE Coffee C contract is the world benchmark for Arabica coffee. The contract prices physical delivery of exchange – grade green beans, from one of 20 countries of origin in a licensed warehouse to one of several ports in the U. S. and Europe. The contract covers 37,500 Lb, or 17,010kg and can be bought against different points in the future, segmented by the following terminal months: March, May, July, September and December. Reference: Intercontinental Exchange.
Commitment of Traders Report
The aim of the Commitment of Traders (COT) Report is to provide detailed information on which type of market participant is doing what and many traders use this information to confirm or deny their opinion regarding market direction. What do we mean by market participants? In a nutshell, anyone who uses a futures market is either a commercial trader or a speculator. Commercial traders include anybody involved in the physical supply chain and they come to the futures market looking to offset their commercial risk.
Speculators (also known as funds) are happy to take on that commercial risk as they seek a profit. Speculators are often referred to as ‘the funds’ or ‘non-commercials’. By looking at the COT, we can watch how the funds are behaving and from this draw conclusions on market direction. The Arabica COT gets released every Friday evening and the data in the report relates to data up Tuesday. Example: The COT report released on Friday 11th October actually relates to data between Tuesday 1st and Tuesday 8th of October. There is a time lag between the data cut off (8th) and data released (11th) Reference Intercontinental Exchange.
When the market has higher prices for future contracts than the front month. This is the norm as contracts further into the future have to take into account costs for storage.
The Consumer Price Index (CPI) is a weighted average of prices of a basket of consumer goods and services, e.g. transportation, food and medical care. The CPI is often used for identifying periods of inflation or deflation.
Double top and double bottom
Double top and bottom patterns are chart patterns that occur when the underlying investment moves in a similar pattern to the letter “W” (double bottom) or “M” (double top). The double bottom is where the market drops, rebounds, drops to the original level where it dropped to previously, and then rebounds again. Double top is when the market grows, drops, grows again then drops down again. Reference: Investopedia. Also, see our January 2019 market report for further explanation.
Dovish monetary policies decrease interest rates in order to encourage spending and stimulate economic growth. This in turn can increase inflation and devalue currency. However, a ‘dove’ doesn’t believe high inflation has a significant impact on the economy, and so is someone who favours low interest rates because they believe they encourage economic growth.
Duration of trends
Trends can be short term (hourly/daily), medium-term (weekly/monthly) or long-term (monthly/yearly). What duration constitutes a trend is subjective and will vary trader to trader. For a day trader who is looking at 60 second charts, an hour would be medium term.
First Notice Day (FND)
For Arabica Futures, First Notice Day (FND) occurs 7 working days before the last working day of the calendar month. It is the first day that an investor who has purchased a futures contract may be required to take physical delivery from the exchange. Physical coffee traders, like us, close out our position (fix the price) before this day because we don’t want to take any delivery of coffee from the exchange.
The Front Month is the Terminal Month (see terminal month below) in the future, nearest to the current date. Since the Front Month has the shortest time to contract expiration, it has the largest trading volume as market players look to close their positions. When reading our market report the NYC analysis will usually relate to the Front Month.
Gap Up/ Gap Down
Gap up is when the futures price opened a new trading day higher, than the level at which it closed the previous day. Gap down is the opposite.
The Green Coffee Association (GCA) is responsible for governing green coffee contracts between the USA and its supplying countries. They produce monthly reports detailing the number of green coffee bags that are stored in US warehouses. The reports provide monthly, and yearly comparisons and can be used as one indicator used by traders to predict future movements of the New York Coffee market based on supply and demand. Although the European Union, which is the larger consumer of green coffee, produces similar reports, these are not as regular.
Another name for US Dollars.
Hawkish monetary policies increase interest rates in order to encourage saving and reduce the risk of inflation, potentially resulting in an appreciation of currency. A ‘hawk’ is therefore someone who favours increasing interest rates in order to prevent inflation increasing, as high inflation poses a risk to the economy as a whole.
An investment to minimize or offset the chance as asset will lose value as a result of adverse price movements.
Names given to the market are all referring to the same Intercontinental Exchange (ICE) Coffee C Futures market, examples include Market, NYC, New York.
The number of ‘open’ positions in the futures market. Every time a market participant buys or sells a coffee future, at some stage, they will need to do the opposite transaction and close their position (for every action there is a reaction). Until they close that position, that lot will remain as 1 lot that comprises the Open Interest number because it’s open and still to be closed. For example, if I buy a coffee future, the Open Interest number will increase by 1. When I sell a coffee future, the Open Interest number will decrease by 1, as it nets out the coffee future I had already bought. That is assuming I have not bought or sold any other futures.
Why is worth paying attention to the Open Interest? It can help give you an idea of what the market is thinking. When looking at the price direction of the market, the open interest increase or decrease will give you an idea of market sentiment. For example, if the market is falling, and the open interest is increasing, this likely means that more and more market players take the view that the market will continue to fall and are selling futures to take advantage of this. You could consult the change in position of the speculators in the COT and see whether this backs up your hypothesis. As with all tools, you seek confirmation across a range of indicators to prove or disprove a view you might have.
Overbought vs. Oversold
Overbought describes a short-term price extreme that the market has rallied too far, and too fast, and experts believe it’s selling more than its actually worth. Oversold is when the market has fallen too far, too fast over a short period and investors feel the stock is trading below its true value.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator. It’s a tool people use in technical analysis that measures recent price changes to evaluate if the product (coffee futures in our case) is overbought or oversold. Most technical analysis of coffee futures will use a 14-day period for their RSI, so the data is giving you an indication of momentum over the last 14 days. What does this look like? The RSI is displayed as an oscillator (a line graph that moves between the top (100) and bottom (0) of a graph) and will give a reading of somewhere in between 0-100 at any given moment. Traditionally, a reading of 30 or less means the market is oversold, and a reading of 70 and above means the market is overbought. If you have a figure of more than 70, or less than 30, it could be an indication that the current trend of the market could reverse as the asset (coffee futures in our case) is under or overvalued. When looking at the RSI on a graph, it will be often be below the graph of the product it’s tracking.
Risk on / risk off
Risk on / risk off refers to changes in investment activity as a response to global economic patterns or events. The theory which states that investors tend to engage in higher-risk investments during periods where risk is considered low, a ‘risk on’ period. Equally, when risk is perceived to be high investors tend to engage in lower-risk investments, a ‘risk off’ period. It is sometimes abbreviated to RORO.
The term ‘risk off’ is used to describe the risk sentiment where traders/investors are pessimistic about the outlook for the economy and so want to reduce their risk exposure and focus on protecting their positions. In a risk off environment prices of very safe assets/commodities will rise as they are in demand, and high risk assets will fall.
By contrast, the term ‘risk on’ is used to describe the risk sentiment where traders/investors are optimistic about the outlook for the economy and so want to buy up riskier assets. This in turn drives up the price of such assets, and lowers the price of low-risk assets.
Short covering is where the speculators (specs) are buying because they are too short and the market is tracking upwards.
Tapering is a process of slowly reducing. In economic terms tapering is used when a central bank (e.g. the Fed in the USA or the Bank of England in the UK) begins to wind down and withdraw from a stimulus program it is currently backing. Central banks usually openly communicate that they will enter a period of tapering in advance in order to alleviate market uncertainty.
Technical vs. Fundamental analysis
Technical analysis: Technical analysis focuses on what actually happens: it is a method of predicting price movements and future market trends by studying charts and patterns of past market action. Fundamental analysis: A method of predicting price movements because of supply side developments like a frost in Brazil or a crop report of a big upcoming crop in Vietnam for example. Fundamental analysis focuses on what ought to happen.
Also called a Delivery Month, refers to the month when a futures contract expires, and when the underlying asset must be delivered or settled. Every futures contract will be assigned to a Terminal Month in the future. Terminal Months are represented by a single, specific letter known as the contract symbol. In the case of Arabica coffee these are:
March – H
May – K
July – N
September – U
December – Z
For example a futures contract bought in June-2021 could be assigned to July (N)2021, September (U)2021, December (Z)2021 or March (H)2022 and so on.
The exchange rate between USD and GBP can be referred to as ‘the Cable’.
The Fed refers to The Federal Reserve which is the central bank of the USA.
The specs/funds vs commercials
The specs, otherwise known as the funds or non-commercials, are market players who are buying and selling coffee futures primarily to make money on the futures transaction, they will never take delivery of the physical coffee. The commercials are market players who use coffee futures primarily to hedge their physical coffee.
Trendlines are drawn onto a chart to reflect a price movement. You need to be able to draw at least three consecutive connecting points for the trend to be valid. You can have an uptrend, a downtrend, and a sideways trend. They help us identify the direction and length of a trend. In this example the trend line is yellow.
Uptrends and downtrends
These are types of trend lines. Uptrends should have higher highs and higher lows with the trend line drawn along the bottom of the trend. Downtrends should have lower highs and lower lows with the line drawn along the top of the trend.