Coffee Looks Set for a Reversal

2014 may be the year of the coffee trade.

 

After falling by 67% over the past three years, the price of coffee is starting to rise. Today, coffee trades about 18% higher than when it bottomed two months ago.

 

More importantly, the price may have just taken out an important resistance level on the chart.

 

Take a look at the chart below...

 

 

It's too early to know for sure if the price reversal will hold. The rally hasn't been strong enough yet to provide a convincing breakout on the chart. But a breakout above the $1.20 price level would do the trick. If that happens, look for a rally to the next resistance level at $1.45 and possibly $1.60.

 

That would be a 60% gain off the bottom – which would be enough to declare 2014 a big year for coffee.

 

Admittedly, coffee looked set to rally last year, too. That rally attempt failed and coffee had a miserable year. Now, though, the coffee bear is another year older, and the price is about 30% cheaper. At this point, there's more upside potential than downside risk for a trade.

 

Of course, what's good for coffee isn't good for companies who profit off the stuff. Rising coffee prices will pressure the profit margins for companies like Starbucks (SBUX) and Green Mountain Coffee (GMCR). These stocks are up 69% and 79%, respectively, over the past year. But if coffee prices rise, it will be hard to argue for more upside.

 

Traders looking to profit on a possible rising trend in coffee prices should consider the iPath Dow Jones-AIG Coffee Total Return Sub-Index ETN (JO). This exchange-traded note uses the futures market to track the performance of the price of coffee.

 

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