Brazil, what a wonderful country. Immediately it conjurs visions of wild soccer fanaticism, Edson Arantes do Ascimento – world ambassador for the limp and needy (Pele to you and I), the Rio ‘Carnaval’ – an orgy of colour, costume, music and dance; then there is the mighty Amazon and it’s rainforest, home to lost tribes of pygmies, the remarkable river dolphin and, of course, the piscatorial predator – the piranha. Not to mention the sun and ‘cheeky’ beaches.
Brazil however, more to the point of my weekly missive, is the largest producer of many a product: sugar cane, soybeans, ethanol and frozen chickens (editor’s note: are you serious??); and, of course, the addictive caffeinous ‘ruination’ of many a good night’s sleep, coffee!
Back in 1946 Ol’ Blue Eyes serenaded on the subject.
Apparently there was and still is ‘an awful lot of it’ in Brazil. When Frankie was drinking it though, it was only about 5c a cup. The price per tonne was, I believe, about US$ 34.
Since then the caffeine culture has well and truly taken us to new levels of wide-eyed wonderment and we addicts all know our cappuccinos from our cremas.
With the demand of the last few decades the price has risen accordingly: and in the last few weeks we have seen a ramping from early January trading below USD120 per tonne to a peak of a few dollars over USD200.
I am sorry to bring bad news, dear friends, but we have had a problem: Brazil has been suffering major drought which has affected production and may do so into 2015 and hence the price has rocketed north!
This a daily chart showing the recent climb and potential topping.
I started to look at this last week and although the opportunity is a tad late for some of you, I rather took a fancy to a short after the first day’s fall which I did take at 197.35. As I type this we are trading almost at 180…my stop loss is now at break even with a trailing stop.
This is the weekly chart outlook: the weekly resistance line was broken quickly as the several weeks of short covering brought a bit more panic.
Longer charts tend to suggest that sharp spikes tend to get sold just as quickly. If this week closes back below the trend line we may assume that the move was more panic and position driven; as I said I am using a trailing stop on the trade as this not a typical trade for me – more of an opportunistic one. And it is in modest size in case my logic is ‘up the Amazon’.
To add something to the perspective of the drought effect to Arabica production, Brazil produces almost as much coffee as the next five growing nations!
To review my comments/recommendations from last week:
A quieter scenario on the Ukraine/Russia front has help the market calm down; the market in Euro holdings evened out perceived shorts which I referred to, with CTA longs reported in the Chicago COT reports.
This has meant that the euro may be seeing a topping out and I prefer the short side on rallies now with a stop above 1.4000 (as then my prior scenario should play out). Ultimately looking for a target in the lower 1.30s.
I haven’t change my view on the S&P.
Lastly, for anyone with the wisdom to be taking advantage of the SNB’s ‘gift to the market’, this week saw another opportunity to buy the big dip to 1.2109 where you are already 80 pips in the money. This is a rare case of knowing the downside is protected: a 120 point stop with a target of up to 300 points has to be worth a look – and you don’t need a chart to do it.
PS. The piranhas ate my website!
Our MarketTutors.com website sadly got delayed and will be up this weekend. Another skinny flat decaf on soy, please barista….before the price goes up!
UPDATE: 22nd March 2014
I am wide awake but smiling: profit taken on Arabica short!
Further to my call that hit the press yesterday in LIW, I am happy to report I have just closed the position before the weekend at 173.70 (late lunchtime London).
I decided that a gift horse should not be ignored let alone considered for dental inspection. Equine halitosis is not for me.
I regret that LIW readers didn’t get to read of the call until after the event, however I hope to change that; at least a number of my clients got in and hopefully some will follow my lead this afternoon.
It was not a case of not liking the position – I did suggest a close today may suggest continuation – however futures markets, like others, can gap dangerously on Monday mornings and it was too good a profit ($23.65 in only a few days) to refuse. Basically a 12% fall.
I will consider going back in depending on conditions on Monday.
Happy days: time for a double ristretto? Just to ruin the taste of the cognac, of course!
Author: David Horton is a partner in Market Tutors Ltd in the city (markettutors.com). He has had a significant career in financial markets; he is a trader and trainer with a passion for coaching and mentoring with a good dose of humour.
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