The coffee market has experienced an impressive rally recently, with both #Arabica (+34c,+19.8%) and #Robusta (+$27, +1.2%) markets gaining.
Technical strength is still notable in these markets, and although we are starting to see signs of retracement, we are very close to crossing 2 key technical thresholds that could signal a shift to long term bull market.
The first threshold is the trend line formed by Arabica over the past 14-month period. Arabica has been in an unequivocal bear market since the highs around 260c in Feb 2022 and the peaks of this downtrend form key resistance indicating the trend.
However, a rally above 210c would breach this trend and could signal the start of a new bullish trend. The 207c resistance would need to yield for that to happen, so it is a level to watch closely, and conversely, a pullback 10 more cents to below 185c would reaffirm the bearish long-term trend.
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The second threshold to watch is the 20/200 SMA cross. This moving average cross is a good proxy for long-term trend-following hedge funds in the market. This indicator is an objective indication that price action has shifted from bearish to bullish on a multi-month timeframe.
At current trajectory, a 20/200 SMA cross is imminent, as these indicators are only a few cents away from crossing.
These major bullish thresholds have been previewed by technical strength in several key studies and signals. Arabica technical studies (RSI and MACD) shifted to positive signals as #KC marched from 171c all the way up to 6-month highs, at 205c.
The moving averages themselves were also indications of the trend shift. The 20-day SMA has served as a short term barrier and indicator of trend. This level provided resistance that held ground for about a month (from Mar 3rd to Apr 3rd), the 200-day SMA lasted longer, and only recently (Apr 11th) was surpassed for the first time in 5 months.
There are some technical indications for caution as well though. The RSI vs its Moving Average (a fairly reliable indicator in commodities) produced a sell signal today in Arabica, suggesting that the market is overbought and ready for a sell-off at 200c levels.
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Moving to Robusta, the 17-month bearish trend was breached with a 3-month rally that has put prices near 2-year highs. Despite the bullish trend, the market is stalling around $2450, which suggests a bullish flag could be forming.
If confirmed with a settle above $2470, this would be a bullish continuation pattern suggesting another leg higher. Unlike Arabica, Robusta technical studies are more unanimous in their support for a bull market.
In our view, a lot of the price action and technical strength has come from a supportive macro, most specifically from a rallying BRL to 10-month highs. However, given the disappointment of the full release of Brazil's new fiscal framework, the BRL sold off, withdrawing some share of support from coffee. Yet, our assessment suggests the BRL is trading close to its fair value now.
Major changes in the BRL or the USD could swing the tide back to negative in an instant.
Ultimately, technical studies are still positive in both #KC & #RC markets but be careful. Don't forget the old addage that "everyone is bullish at the top" and it's when things are at their most bullish that the tide can turn.
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